A roomful of Kellogg students were lucky enough to receive the industry insight of Equity Residential (EQR) President and Chief Executive David Neithercut at an Executive Speaker Series Luncheon sponsored by the Real Estate Program on April 4, 2012. Neithercut spoke briefly on his background before turning full attention to Equity Residential, his views on the marketplace, and his beliefs about its future.
Neithercut spoke of beginning his career at Continental Bank where he underwrote acquisition, construction, and syndication loans, among others and he emphasized how important gaining a lender’s perspective to real estate has been to his career. He joined Equity Residential as Chief Financial Officer in 1995 and served in that capacity until 2004, when he became Executive Vice President of Corporate Strategy. In 2006 he was tapped for the chief executive position. Having now spent six years in that position, Neithercut framed the luncheon around the perspective his position affords him to share.
Neithercut talked about the drivers behind the recent health of the multifamily market. He cited the individual choices of people to marry and have children later in life, unemployment for the college educated at around 4%, and tightened single family lending criteria as the keys to the present state of 4 to 5% vacancy and 5 to 6% annual rent growth in EQR’s apartment properties.
|From left to right: Denise Akason, Devin Duffy, David Neithercut and Craig Furfine.|
Neithercut spent time explaining the reasoning behind EQR’s choice to refocus its portfolio on major “24-hour” cities in the U.S., such as Seattle, New York, and San Francisco. Equity’s position is that the second tier American cities have too many opportunities to develop new supply, and therefore require more of a “trader” than “investor” mentality. Equity, he says conversely, “is interested in ‘forever’ properties.” International markets, he said, have not yet presented a compelling enough argument to take on the risk, with many premier locations too “pro-tenant” rather than “pro-landlord”.
On EQR’s acquisition, rather than development, of most assets, Neithercut claimed that many of EQR’s peers may be more inclined toward development from a historical perspective, having begun as development companies. As a public company, Neithercut explained, the REIT requirement to dividend most of its taxable income precludes proceeds from dispositions from being used as development funds in most cases.
On mergers and acquisitions, Neithercut commented on EQR’s recent attempt at a partial- interest acquisition of Archstone. He explained that Archstone represented the type of major market assets EQR is seeking, and acquisition of a large portfolio of them was preferable to “trying to grow a company property by property and by ‘winning’ auctions.”
Asked about the future of the GSEs, Neithercut focused on the annual liquidity provided by Fannie Mae and Freddie Mac of $45 billion to the multifamily industry, which he believes will be a difficult run rate to maintain. He stated that partial motivation for recent dispositions of EQR’s lesser desired properties was a hedge against a future without agency participation in the multifamily arena. While Neithercut espoused a belief that the multifamily industry would be “just fine” without the agencies as regular lenders, he stated that he hoped there would continue to be a reserve mechanism to ensure market stability during periods of disruption.
In closing, Neithercut gave students advice, starting with a strong suggestion to focus their resumes on their contributions and not their positions. He lamented that, as an employer, he didn’t care where they worked, but that he wanted to know how they handled their responsibilities. He further emphasized the importance of learning strong investment fundamentals and discipline, and wished all of the students good luck as they continue to build their careers.