The NYU School of Professional Studies Schack Institute of Real Estate is recognized globally as one of the world’s leading centers of real estate and urban research and industry engagement. In August, the institute also announced its plan to open the NYU Institute for Cities and Real Estate in Emerging Markets in Shanghai. The new academic institute will have a research focus on real estate in China and emerging markets. NREI recently talked with real estate economist Sam Chandan, the Larry & Klara Silverstein Chair in Real Estate Development & Investment with the Institute, to hear his views on what’s ahead for commercial real estate and how the Shack Institute is adapting to serve the changing needs of the industry.
NREI: There has been a lot of recent research pointing to moderating growth ahead for commercial real estate in 2020. What’s your view from 60,000 feet on what’s ahead in the coming year?
Sam Chandan: There are indications in the data that we are seeing moderation in the pace of growth globally. The milestone of the 10-year anniversary of this expansion—the fact that we are in the longest expansion in modern economic history in the U.S.—is certainly an important touchpoint. There is a consensus among many economists that there is a high likelihood of an inflection in the next 18-24 months.
When we look at some of the underlying measures of activity that are driving these concerns, certainly investors are looking at things like the inversion of the yield curve; they are also reading into the shift in Fed policy to one that is more dovish and accommodative. The labor market headlines tell a different story. Unemployment rates are very low, but the tightness of the labor market has also made it difficult for firms to fill open positions, which is leading to higher wage growth.
NREI: There do seem to be a lot of mixed signals. What are some of the positive signs that this lower for longer pattern of growth could continue?
Sam Chandan: Economists are looking at some of the cyclical indicators and seeing signs of a slowdown. There are also concerns around some of the more idiosyncratic features of the current cycle, many of which have a political dimension. For example, there are concerns around the potential impact of trade disputes with our major trading partners and disruption in confidence from the exit of the U.K. from the European Union. In the case of the latter, the economic implications for the U.S. are not as material as sentiment.
We do have some positive indicators as well, the most important of which is healthier wage and income growth. That coincides with measured inflation. We are able to maintain the low rate environment because we have price stability. That is important, because when we look at the suite of tools that the Fed has at its disposal, they are limited. So, being able to exercise discretion over the key policy tools of the fed funds target rate is important.
Another factor that is important for the real estate market specifically is that we have a real diversity of equity sources, much of which is undeployed—the proverbial dry powder. With so much capital on the sidelines looking for opportunities to be put to work, we have something of a floor underneath liquidity in a downturn. In our baseline scenario, we do not expect that we will find ourselves in a market where there is no equity or debt available.
So, when things do begin to slow down and we begin to see some weakness in pricing, there is a large number of investors who are waiting for that lessening of the competitive environment to be able to put their money to work. That will help to ensure the liquidity of commercial real estate investments and will help to facilitate exit strategies for investors when the broader economy weakens.
NREI: We’re heading into another presidential election year in 2020. How do you think that election could impact commercial real estate activity over the next year?
Sam Chandan: What we see is very, very strong policy rhetoric in the approach to the federal election. Historically, once candidates are selected, language tends to moderate from what we see and hear in primary season. A lot of what we should be paying attention to in this next election cycle is at the state and local level. Real estate investors and operators will encounter policy proposals that they perceive as threatening. New York City, for example, has new rent laws going into effect. Depending on where you are, there may be discussion around higher taxation of commercial properties, controls on commercial rents, or local wealth taxes, to name a few. We see many of these proposals as responses to a very real crisis in the affordability of housing in major urban centers.
NREI: When we look back at this past cycle, there seems to be a number of secular trends that are shifting the playing field and influencing investment decisions. What do you see as some of the biggest secular trends influencing the real estate sector?
Sam Chandan: We are seeing fundamental changes in the way we use space. This is manifesting in very different ways for different property types and in different locations. Whether we are looking at office, multifamily, industrial, or the myriad types of retail space, this is not a process that suddenly comes to an end. Change as a persistent condition requires that we be much more nimble in the real estate sector. The impact of technology on space use patterns—not only how we use space, but how we manage it, has never been a more significant aspect of the market than it is today.
NREI: Is the Schack Institute introducing any new courses to address some of these changes occurring within the industry?
Sam Chandan: We invest a lot of time and energy in getting input from a range of constituencies, including employers, industry partners, faculty members, students and alumni, to make important innovations to the curriculum. On our accelerated track, full-time graduate students can now complete their degrees in just one year. On our executive track, working professionals from other parts of the country will be able to pursue their degrees in New York City on weekends beginning next year.
In the past year we have rolled out curricula focused on data analytics and also property technology and innovation. Data analytics is important no matter what career path a student wishes to pursue. In any analyst or associate position, students are going to be called upon to work with data to inform their decision making. The more comfortable they are and the more expert they can be in looking at data critically and using data to inform decisions, the better positioned they are.
Even for students who are planning to go into very traditional areas of the industry, understanding how the process of disruption can impact their business is essential. At this point in time, you don’t have a full understanding of the real estate industry if you have not been exposed to technology, innovation and disruption. So those are two key areas. Other areas of the curriculum where we are investing heavily is in management, leadership, ethics, and decision-making. We want students to have hands-on experience in these areas.
The Schack Institute is also continuing to expand its global focus. Through our global courses and field intensives, we are making sure students have an opportunity to spend time in other markets around the world. The Schack Institute also announced earlier this summer that it had received the largest gift in its history to open a new center in Shanghai, in early 2020. We will have faculty and degree programs in Shanghai with a research focus on emerging markets.
NREI: Diversity is an area the real estate industry has struggled with. Are you seeing more diversity from people now coming into real estate, and any examples of ways that groups are trying to encourage diversity?
Sam Chandan: Diversity is a major area of focus for us. For example, we kicked off our National Women’s Leadership Conference three years ago. With the support of CBRE, RXR, Trimont, and key board members, it has grown into one of the largest events of its kind. We just held our third annual conference with over 500 people attending. We use the conference not only as an opportunity to bring women leaders and young women in the industry together for mentoring opportunities, but also to raise the visibility of very successful women in the industry. Proceeds from the conference go to support women’s initiatives at Schack, and we now have an endowed women’s scholarship fund. We are using that as a recruiting tool to bring more women into the program.
Coinciding with the 50th anniversary of the Stonewall riots, Schack also announced a permanent Pride scholarship fund, supported by Jimmy Kuhn, president of Newmark. The first Pride scholarship to a LGBTQ student or ally will be awarded next spring. We have also just announced a scholarship specifically for someone who attended a historically black college or university or a historically hispanic-serving institution for their undergrad. All of this is designed to encourage a diverse mix of students, because we think having students with diverse backgrounds and experiences makes for a better program for everyone, and also helps to build the pipeline of talent and next generation of industry leaders.
NREI: What do you see as some of the key issues to watch for the commercial real estate industry in the near term?
Sam Chandan: As we discussed earlier, one change is the way we use space. Two other hallmark issues for us as we look forward are climate change and resiliency and the competitiveness of cities, which also speaks to cities’ capacity for inclusive growth. Climate change is a very real issue for anyone with exposure to real estate. It is obviously a highly politicized issue, but there is a growing consensus in the industry that how we invest in infrastructure, manage properties and build resiliency into our cities are all serious questions that need to be addressed. We also have a lot of cities that are under significant pressure because of affordability challenges and fiscal challenges, such as related to unfunded pension liabilities. These all have implications for long-term city competitiveness and the value of our real estate investments.