Updated with correction
Jeff Jacobson fell backward into the real estate investment business.
The global chief executive officer of real estate investment management firm Lasalle Investment Management is an economist by training who had a strong early interest in commodities trading. His first job out of school was working for then Chairman Gerard Louis-Dreyfus in the New York office of Paris-based Louis Dreyfus Group, a commodity trading and real estate firm. While there, Mr. Louis-Dreyfus directed him into real estate.
A native Midwesterner, Mr. Jacobson yearned to return to the heartland and ended up at Chicago-based LaSalle Partners Inc. in 1986.
Since joining LaSalle, Mr. Jacobson has risen through the ranks. In 1999, LaSalle merged with London-based Jones Lang Wootton, transforming it from a mainly U.S. real estate investment firm into a global manager. A year later, Mr. Jacobson moved to London for what was to be a three- to five-year stint as regional chief executive officer of LaSalle Investment Management's European operations.
That short-term transfer become permanent and in January 2007, he was promoted to global CEO. More than 65% of LaSalle's investment activity and personnel now are outside the United States.
Even though LaSalle has been actively raising capital, firm executives have invested little during the past 12 months. It still has about $5 billion to spend, including capital from the $3 billion LaSalle Asia Opportunity Fund III, the second-largest real estate fund to close last quarter and the $820 million LaSalle Japan Logistics Fund II. In April, the firm began raising a third European fund, LaSalle European Ventures III, a closed-end real estate opportunity fund that has a €1.25 billion ($1.56 billion) target.
Mr. Jacobson said it has been an eventful 20 months but the next year or two will be a wild ride. The big question for him and all real estate managers is when will it be safe enough to invest capital?
What is your view of the global outlook for commercial real estate? In the short term, which I would define as 12 to 24 months, it's going to be difficult. Real estate is a capital-intensive asset class and one that depends on the availability of debt. As debt dried up over the past year, it has significantly impacted pricing and liquidity. We are currently seeing very little trading (sales), and the little we are seeing is by motivated sellers. When liquidity and a somewhat orderly market come back, it will be at lower levels of activity and values compared to the incredibly positive run we've had over the last five to six years.
What are the main issues you now are grappling with? In trying to assess the pricing levels the market will find once the capital markets stabilize. The question everyone is trying to get their heads around is how much occupier demand will there be for various product types? How much could rents fall? What will that mean for my property?
And in the meantime? Real estate is almost a block-by-block asset class. When you generalize, it's a mistake, but I will do it anyway. Construction that has not been started now will not get done. As demand comes back, construction prices will rise. You will be able to buy properties at discounts to what they could be built for. We have to get from here to there, but it will be a rough ride getting from here to there.
What are you doing now? We are very focused on playing defense and preserving value. Keeping income in place is critical. If you need to cut rents, cut them. If the buildings need capital improvement, do it. Also, make sure you're not turned into a forced seller watch debt maturities, look to extend loans where possible and keep cash controls tight. Those properties with debt due in the next 24 months will have to extend their loans. Banks will support those who kept up good relationships with them.
Does LaSalle have debt coming due in the next 24 months? Sure, but almost zero is by securitization. We're mainly in core and core plus, and not maximizing debt. We would leverage 75%, but in general, we have not exceeded 60% to 65%, which tended to be more of a bank market. Much of it is in London and Asia, where securitization did not take off and it's more banks and local bank relationships. One of the things we have is risk monitoring on the portfolio. We go through every loan and monitor them. If a loan maturity is coming up, we have been proactively extending maturities wherever possible.
How successful have you been? To date, we are generally successful. We have not had a situation where we can't roll over the debt. We've extended maturity dates from 2008 to 2010, and we would like to extend beyond that. Banks have so many immediate issues that they don't have time to talk about it right now. There's a problem getting their attention.
But what about banks that have liquidity issues? Very few banks want to squeeze out good borrowers automatically on breaches. Relationships are a two-way street. If there are a lot of forced sales on good assets, it will drive down values. So, any manager who has investments with debt will be spending more time with lenders then they have in the past.
When credit returns to the real estate market will it be business as usual? One of the more interesting things that will evolve in this credit crisis will be the future use of leverage and how it fits within an institutional investor's portfolio. Look back 20 years, many institutional investors wanted zero leverage. Then after the RTC (Resolution Trust Corp.), the opportunity investors bought distressed debt and distressed assets. They bought these distressed loans so cheaply that they could make a good return without leverage. As prices began to be bid up as the market recovered, people began to use more and more leverage to preserve their high levels of returns. This increased use of leverage worked for a long time and was not limited to the real estate world private equity and hedge funds among others increased their use of leverage. Leverage, however, does not add alpha. It simply accentuates returns on both the upside and downside as markets (betas) move up and down. ... My suspicion is that looking forward, many investors will look to use less leverage in their real estate portfolios even if this may result in lower expected returns.
Where will the investment opportunities be? Looking offensively over the next 12 to 24 months, you want to have dry powder. The best investment opportunities in a generation will emerge during this period and well-capitalized investors will be well positioned to capture them. We see opportunities first emerging in markets where the price discovery process is occuring more quickly ...
(Also) based on appraised values, prices in the United Kingdom have already fallen 25% from peak to today; a limited number of transactions are getting done at prices another 10% to 15% lower. ... In this environment, we can buy good assets. ... In the long run, we are very confident these assets will perform well.