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May 05 2011

Tale of Two Coasts:

The Recovery of the Development Market

By Devin Duffy '12


On March 2nd, the Kellogg Real Estate Program sponsored the 4th Annual Distinguished Alumni Panel titled “Shovel Ready: The Future of Real Estate Development.” The panel was moderated by Doug Kiersey (’02), Senior Vice President at ProLogis, and featured distinguished alumni from the financing, advisory, and principal sides of the industry. The panelists included Rick Baer (’88), Senior Vice President at Bank of America N.A., John Montaquila (’95), Principal at M3 Capital Partners, Anthony Pricco (’02), Principal at Bridge Development Partners, and Kent Swanson (’86), Principal at The John Buck Company. The panelists shared their perspectives on many topics including the current state of the development market, project financing, and the potential recovery pattern of new development over the next few years.

Tale of Two Coasts
Panelists Anthony Pricco '02, Kent Swanson '86 and John Montaquila '95 at the 4th Annual Kellogg Distinguished Alumni Panel
Photo by Jason Brown
The panel opened with a discussion of the Chicago office market and the key fundamentals that drive demand in this sector. Despite the muted local employment figures, the Class “A” Central Business District office market showed modest leasing activity in late 2010 as professional services firms looked to take advantage of favorable leasing conditions. Kent Swanson also noted that some suburban office tenants are looking to capitalize on the favorable tenant market and “trade-up” to space downtown. However, due to the glut of vacant Class A office space in Chicago, Mr. Swanson predicts that it may be at least five years before any new office development hits the market.

While the real estate newswire has been dominated recently by M&A and portfolio acquisitions in the industrial sector, new development in most markets remains unattractive. Anthony Pricco said that despite improvement in some fundamentals, the surplus of warehouse and flex assets valued at below replacement cost is stalling momentum in new development. Pricco mentioned that Bridge Development Partners is trying to gain traction by targeting build-to-suit users in select submarkets where development is more feasible.

Buoyed by the support of the agencies and select Wall St. lenders, the panel agreed that the lone bright spot has been in the multi-family sector. Rick Baer noted that as financial institutions like Bank of America look to rebuild their balance sheets, multi-family construction loans in New York and Washington, DC are proving to be most attractive across all asset classes and markets.

The event concluded with a discussion of what form a recovery in the broader development market will take. Specifically, who will emerge to lead the revival and what will the recovery pattern look like? The panel believes that REITs with healthy balance sheets and local merchant developers are well-positioned to kick-start the recovery. However, due to disparate market fundamentals and employment figures in certain markets, the pace and nature of the recovery will varying around the county. In the next 2 -3 years, the panelists expect coastal markets such as New York, Washington DC, and San Francisco to experience a relatively robust revival in office, retail, and multi-family development while in the near term, recovery in the Midwest is expected to be muted across most asset classes.

About the Author

This article was written by Devin Duffy  '12.