To say that 2008 was a difficult year for the real estate sector is an understatement, but Bruce Mosler, chief executive of real estate advisory firm Cushman & Wakefield, remains resolutely positive about the year ahead – depsite widespread economic gloom and tumbling property values.
The root cause for optimism, according to Mr Mosler, is the fact that in 2009, real estate values will start to fall in the US and Europe, where there has been extraordinary appreciation in real estate values over the past few years. “We will see cap rates rise somewhere in the six, seven or perhaps even eight rate as values reconcile and there will be investors poised to take advantage of a marketplace that will once again become interesting for them,” he says.
Even though the US and UK were the first to feel the effects of the credit crunch, Mr Mosler predicts that they may well be the first to recover from it. “Some of these assets, distressed or otherwise, will have to be sold in the second half of 2009 and I see business being done in the second half of the year in the US because the market is going to be looking extremely attractive,” he says.
Towards the fourth quarter of 2008, things got appreciably worse with the credit lock-up continuing into the first month of this year. According to Mr Mosler, real estate investment was down about 73% in the US and 50% in EMEA. “But I think we will see the credit lock-up ease off with the [US] government’s stimulus package, and the potential of creating an aggregator bank to absorb toxic assets gives me hope,” he says.
But even Mr Mosler has to admit that challenges remain. The commercial sector will continue to have a hard time this year, he says, particularly in the US, where it will be difficult to replace debt when some of the debt terms mature and roll over. “On that level, it will be a difficult first half of the year but I believe the long-term health of the commercial office sector in the best global locations will be quite good by the end of the year,” he adds.
The market conditions of the past few months have seen multinationals reassessing their real estate portfolios in a number of ways, whether by doing sale and leasebacks to raise cash or by simply renegotiating lease terms. “Companies are looking to take advantage of a softer marketplace to renegotiate, to extend and blend their lease rates – if your lease has expired, this is a moment in time you can negotiate more favourable terms not just on the rates but on flexibility,” says Mr Mosler.
The story across the board is one of divestment rather than a period of rapid expansion as companies try to conserve as much cash as possible. But for Cushman & Wakefield, the current market conditions, while prompting a number of job cuts in the US last October, have meant business as usual. “Our strategy is long term and we’ve never been the most aggressive or largest acquisitor. We’ve always been careful to keep a low level of debt in the business,” says Mr Mosler.
Instead, the company tries to be selective and acquire small, best-in-class businesses without spending huge sums on significant acquisitions. “Clearly, acquisition has slowed and most of what we did was at the beginning of 2008,” says Mr Mosler, who is more concerned at this point with ensuring that Cushman & Wakefield has responded to market conditions by reviewing its talent base and business. “We are certainly going to be more cautious in our growth this year but will continue to take advantage of talent when we see it because talent drives a service business like ours,” he says.
The company has not closed any offices yet but may look to do so, although Mr Mosler says it is too early to tell: “Before we close offices we will look at right-sizing them, and that has already begun.”
Although expansion is off the agenda at the moment, 2008 was a year in which Cushman & Wakefield expanded its global reach significantly. The regions which the company saw as representing ongoing opportunities for expansion were Asia and the Middle East.
The firm opened its first Indonesian concern though a strategic acquisition in November last year as part of its greater Asia strategy of locating in platform and flagship cities across the continent. “From our vantage point, Indonesia represented a large pool of talented people and part of a larger strategy to expand our business into the key cities of Asia,” says Mr Mosler, who views Asia as a critical part of the company’s global expansion strategy. And to complete Cushman & Wakefield’s pan-Asian platform, the company opened its Australian business in January last year. “Although Australia is part of a plan to capture pan-Asian flagship cities, the common theme again for all of our expansions is that we found the talent there,” he says.
In the Middle East, Cushman & Wakefield opened an office in Dubai in mid-2008. The firm was the last among its competitors to establish a base in the region – most had already begun harnessing the extraordinary growth in the UAE’s real estate market. “For Dubai, we were waiting to see what the opportunities were in the Middle East, to reach the greater region from a regional office,” he says.
He explains that it was a question of finding the right talent at the right moment – in order to make a long-term commitment to what the company sees as a major economic power in the world. “We are using Dubai as a launchpad into the Middle East but Dubai still has long-term potential even though it is clearly going through a very challenging time,” he says.
With the opening of the Dubai office, the firm is starting to acquaint itself with the Middle East, and according to Mr Mosler will take its time and make sure it captures the market in a well-informed manner. “I am amazed at the openness and the desire to capture knowledge from us in planning, project management and development over there and I see huge opportunity,” he says. From Cushman & Wakefield’s perspective, whether it be Saudi Arabia, Abu Dhabi or Egypt, they all have huge potential, but it is a question of “walking before we run”, says Mr Mosler.
The most important factor in all the expansions the company has made is its commitment to putting local leadership in leadership positions. “The areas we have the most success are where we have local nationals leading our business, who understand the culture, the fabric of the societies in which they work and who have a deep commitment not just to the company but to their own country as well,” says Mr Mosler.
The perfect example is in India, where the firm has been operating for more than 10 years, which Mr Mosler says has only been possible because the firm has had excellent leadership. “There are always challenges because it takes time to overcome cultural barriers and to understand a region. We are taking the same approach in Indonesia where we have local talent driving the business, and we will do the same in the Middle East,” he says. Serving the needs of both multinational clients and local clients is what makes for a better chance of success when expanding into a new region, he adds.
CUSHMAN & WAKEFIELD
New York City, US