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RCA Technology & Intelligence Briefings Issue 5
Interview with Ken Riggs — Fourth Quarter 2006
| Kenneth P. Riggs Jr., CFA, CRE, MAI
Chief Executive Officer
Real Estate Research Corporation (RERC)
980 North Michigan Ave
Chicago, IL 60611
Tel: 312-587-1900
Fax: 312-587-0357
Email: riggs@rerc.com
Web: www.rerc.com |
Listen to the interview (mp3 format, 17MB).
Go back to overview page of issue 5.
History of Real Estate Research and Consulting
RERC has been in business since 1931, initially focusing on the repackaging of information; the company has transitioned into consulting—i.e., applying information.
Real estate has evolved from a private industry that operated on the lack of information to one for which too much information is available for purchase and for free; people are challenged to process all the sources of information to determine which add value for them.
The Importance of Relationships
Relationships have always been important in the commercial industry, but the overload of information today has given “relationship” new meaning.
Clients are not as loyal as they used to be—fickleness has crept in; RE pros have to work harder because clients know there are competitors eager to earn their business.
The needs of clients must be given the highest priority in this performance-driven environment; clients expect timely and high-level service or they will turn elsewhere.
The crux of providing value to clients is transforming information to knowledge; successful agents interpret information and give clients advice that makes them want to come back for service.
To be competitive, RE pros need to develop a systematic, vigorous approach to keeping their knowledge base at a high level; earning and keeping the respect of their clients requires a commitment to a disciplined research routine—the equivalent of going to school.
Commercial Real Estate Cycles and Trends
Although many market observers thought commercial transactions would start to slow, 2006 is on track to have one of the highest levels of transactions in years.
The reason for the ongoing boom is that the alternatives (stocks and bonds) are not too attractive and commercial real estate has come of age as an investment.
The industry is impacted demographically by the baby boomers, who represent about one-third of the US population base and are moving into retirement.
A notable trend is the broadening of commercial investment beyond the traditional, core property types (apartments, industrial, retail and hotels); for example, investors recognize opportunity in infrastructure investments and retirement developments.
The rebuilding of New Orleans is an awesome undertaking that will carry the city into the future; the effort, which is just starting in earnest, is the largest rebuilding of a city in our lifetime; the commitment is tremendous by those who have been located there and others who want to see the city successful.
Other markets to watch are the coasts—they carry more volatility on both the upside and downside than the rest of the country; the housing market has started to turn on the coasts.
Areas that are oil dependent are likely to be affected by the economic fortunes of oil—e.g., New Orleans, Houston and Denver; supply and demand for space and investment outlook will be impacted in those regions.
Markets around the US are not operating in unison; also, different property types have different cycles.
Outlook for Cap, Discount and Interest Rates
Fed action is key to what happens with rates; the higher short-term rates (around 5.25%) that have resulted from years of increases are likely to stay, and long-term rates are moving up; therefore, upward pressure will continue on the cap rate and discount rate in 2007.
A mitigating factor is that the space market is starting to gain traction; demand fundamentals have improved for office space—declining vacancies help prospects for income growth long term.
The potential for rising rates is a factor for the brokerage community and investors because of interest rate risk and the implications for refinancing properties; generally, cap rates and discount rates follow interest rates up.
The Biggest Challenge for Commercial Real Estate
Over the next year, the interest rate issue should be the biggest challenge; rising rates mean the loss of positive leverage opportunity, where borrowing rates are more favorable to acquisition equity rates.
Near- and long-term, construction costs are a concern; there has been a bubble of price increases in all construction elements (steel, concrete, timber, etc.); if this rise continues, rents will rise.
Another indicator that rents will rise is the fact that rents and constructions costs in many parts of the world far outpace the US, even in major cities.
One upside is that the value of existing property will be reinforced.
Changes in Commercial Real Estate Technology
Technology has been affecting the industry from brokers on the street with handheld PDAs and GPS systems that talk all the way up to sophisticated smart buildings; technology applications will continue to unfold.
Thoughout history, people have overestimated the impact of technology in the short run (e.g., the dotcom boom/bust) and underestimated it in the long run; the world today is underestimating the role that technology will play—it is on the cusp of its development.
How to Stay Relevant for Clients
The key to professional success is having an inquisitive and open mind; be able to marry the old with the new; as the world becomes more impersonal, people are starved for personal attention—handwritten notes make an impression.
Blend the tried-and-true advice of Dale Carnegie’s How to Win Friends and Influence People with technology issues; understand how different generations operate and relate to each appropriately—older people may want a phone call, but younger ones will prefer email.
Favorite Resources for Keeping Current
For insights on economic and financial matters, Riggs goes online to Wall Street Journal, Business Week, The Economist and Globe St.; by taking 15 minutes total to visit these sites, you can learn a lot.
Soundview summaries of books (MP3 format) are a great timesaver; Audible Books is a subscription source for audios of longer books.
Hardback books remain a good option for material to keep.
RERC’s Value for Commercial Practitioners
RERC is a resource for insight, vision and applied knowledge for the commercial industry; the company has been a thought leader and source of valuable advice for 75 years.
Products and Sites mentioned by Ken Riggs:
Real Estate Research Corporation: www.rerc.com
Financial and economic resources: www.WSJ.com, www.BusinessWeek.com, www.Economist.com,www.GlobeSt.com
Soundview audio book summaries: www.summary.com
Audible Books: www.audible.com |
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