What Was Real Estate Industry’s Role In Housing Collapse?

 From the beginning, banks have been under fire for their role in the housing industry collapse. That pressure has only intensified in the wake of disclosures about possible foreclosure abuses.

But what about the role of the real estate industry? Urban Land Institute (ULI) Chairman Jeremy Newsum says developers and brokers must accept their "proper share of the blame" for the series of missteps leading to the global economic recession and the housing and commercial property decline.

"There were many keys to this bomb and we held one," said Newsum, executive trustee of U.K.-based Grosvenor Estate. "The fact is, we (real estate industry professionals) lost control of the agenda. Real estate is about buildings and the people who occupy them, collectively forming an urban community. Real estate is not primarily about money, and we should not have allowed real estate to become just another playground for financial engineers."

Newsum made his remarks this week at ULI's 2010 Fall Meeting in Washington.

From the recession of 1991-92, housing prices slowly recovered, until they picked up speed in an era of rising prosperity and falling interest rates. Home values began to accelerate from 2002 to 2006, when they peaked.

The next big thing

 After the dot-com stock implosion, investors were looking for ways to generate large returns. Buying and "flipping" properties, as well as trading in securitized mortgages, provided another "get rich quick opportunity."

The resulting collapse in home values, caused in part by a tidal wave of foreclosures, has devastated housing markets where prices had risen the most - southern California, Arizona, Florida, and Las Vegas. Homes in some of these areas have lost as much as half of their value.

The crisis threatens to spread to the commercial real estate sector, where developers overbuilt and now, with a shrinking economy, can't keep commercial space rented.

The new normal

 According to Newsum, the "new normal" for the industry is one that is focused on the operators - the creators and owners of real estate who view their businesses as a long-term investment. The "old abnormal" was real estate being the "puppet of finance," he said, with real estate viewed more as an investment opportunity than a building for occupation.

During the boom Newsum said it became increasingly common for large financial institutions to hold direct portfolios of real estate. He sees that as a mistake, pointing out that those managing the portfolios are, by the nature of their business, more apt to give far greater priority to "collecting the rent checks" than analyzing real estate fundamentals or ensuring the well-being of building users. 

"All those involved in restructuring portfolios - holders of equity and debt, plus the managers - must use the real estate business model as the right long-term structure for the industry," he said.

Closed-ended real estate funds

 Newsum also pointed to closed-ended real estate funds (generally unlisted private real estate funds with a fixed fund size and a limited term, typically 5-10 years) as being "inherently unstable," in that they "blithely ignore" the long-term nature of the underlying assets. For the industry to restabilize, he says these funds should "always be a sideshow, rather than the main event," and not become the industry norm for how and when properties are bought and sold.

 "The era when funds predominated is over, Newsum said..

 Did anyone do it right? Newsum points to Hong Kong, which he says is now dominated by companies focused on the long term. It's an example, he says, of what the industry should strive for in the United States and Europe.

 To attract the best and brightest to the real estate industry, Newsum suggested that seasoned professionals must put more effort into "selling the slow buck" and emphasizing the value of long-term thinking to the next generation of younger practitioners, whose penchant for instant gratification will not serve them well in real estate.