MBA team wins first place in National Real Estate Challenge held at the University of Texas at Austin on Nov. 21. From left to right: David Eisenman, Maribel Garcia Ochoa, Jon Lam, Abby Franklin, Lecturer Bill Falik, Matt Tortorello, Andrew Sublett and Eric Valchuis.
Haas took first place in the 17th annual National Real Estate Challenge for the second year in a row, taking home a $10,000 prize. Teams from the nation’s top-ranked business schools competed at the University of Texas at Austin on Nov. 21.
The Team: David Eisenman, MBA 20, Andrew Sublett, MBA 20, Matt Tortorello, MBA 20, Eric Valchuis, MCP 20 (city planning), Maribel Garcia Ochoa, JD 21, and Jon Lam, MBA 21 & MRED+D 20 (real estate development and design).
The Field: Finalists included Haas, Georgetown’s McDonough School of Business, University of Chicago’s Booth School of Business, and UPenn’s Wharton School.
The Challenge: Playing the role of a real estate investment firm, the Haas team had to decide if it should buy 1,000 mixed-income housing units in Lakewood, a fictional city modeled after New York. The firm would receive a tax abatement from the city if it converted a portion of the units into affordable housing.
The Team’s plan:The team weighed the pros and cons of investing in a housing portfolio that included market-rate and affordable housing units. After careful consideration, the team decided to invest in the Lakewood property.
The Haas Factor: The Haas team received coaching from Professor Nancy Wallace, Lecturer Bill Falik, Abigail Franklin, an investment banking and real estate student advisor, and Haas alumni.“Questioning the status quo and having confidence without attitude set us apart from the pack,” said Eric Valchuis, MCP 20. “We prepared for this challenge for months and delivered a story-centered presentation to the judges.”
The team also benefited from Berkeley’s unique Interdisciplinary Graduate Certificate in Real Estate program, allowing us to take classes at Haas, the College of Environmental Design, and Berkeley Law, Valchuis said. “As a result, we demonstrated a cohesive understanding of the social, political, and financial impacts of our investment that may have been more difficult for other schools to match.”
Yet those seeking to make housing cheaper through innovation face a slew of challenges: Housing industry entrepreneurs must navigate a thicket of environmental and other governmental regulations, as well as secure financing for projects that may not fit the industry’s mold.
“The need for innovative solutions and outside-the-box thinking has never been more urgent, and we’re encouraged by the growing number of entrepreneurs who are challenging our antiquated housing system and considering new ways for housing to be more equitable and affordable across the board,” said Terner Center Faculty Director Carol Galante, who previously served in the Obama Administration as U.S. Assistant Secretary for Housing.
The Housing Lab, supported in large part by the Chan Zuckerberg Initiative, aims to help entrepreneurs navigate housing laws and regulations, sharpen their business plans, and locate investors—all with an eye toward making housing less expensive. Applications open June 10 for non-profit and for-profit startups to join an inaugural cohort of five companies. The successful candidates will be announced in September.
“We know the housing crisis is a complex problem that can’t be solved by innovation alone, but we believe entrepreneurs have a key role to play in contributing to the solution,” said Housing Lab Program Director Michelle Boyd, MBA 19, who began working on the accelerator as a student and is staying on post graduation to lead it. “Because the housing industry is extremely regulated compared with other industries, these entrepreneurs need support.”
Entrepreneurs focused on housing face a huge number of hurdles, including national, state, and local regulations on areas ranging from construction standards and environmental sustainability to rent control and home financing. Local zoning and development plans, often highly politicized, can confound even a savvy and experienced entrepreneur.
Adding to those challenges, many housing innovation startups would have trouble getting accepted into a traditional technology-focused accelerator.
“Most accelerators and VC funds direct the majority of their capital to pure technology-focused innovations, and we think there are a lot of other good ideas out there that may not fit the VC model—either because they’re not a pure tech company, or they’re focused on a more regional market,” Boyd said. “These companies are also asset-intensive, meaning they own and operate real assets and buildings, and there’s is less support for startups like that. We want to elevate these ideas and connect them to the capital they need to scale.”
Seed funding for housing innovators
Startup candidates for the Housing Lab could include, for example, a company that’s developing a construction method using low-cost yet environmentally friendly building materials, or one that’s promoting a new home-financing product aimed at low-income buyers. Or, a candidate might be producing multi-unit “co-living” structures suited to urban centers, or cottages designed to be tucked behind suburban single-family homes.
Applicants need to demonstrate their ideas’ validity through either customer feedback or extensive market research, and also must be working on their venture on a full-time basis. Candidates should also show a recognition of longstanding problems in the housing industry, such as predatory lending and housing discrimination, and how their venture plans to operate responsibly, Boyd said.
Successful candidates will join the six-month program in the fall and receive seed-funding grants of $100,000 to $150,000. Participants will meet both virtually and in-person at the Terner Center for coaching sessions on developing and scaling their business plans and understanding how best to work in the regulatory environment. In addition to learning about funding sources and meeting potential investors, participants will also gain access to faculty and alumni networks as well as to the Housing Lab’s advisory board of successful entrepreneurs, government leaders, investors, and housing advocates.
Prof. Nancy Wallace has been honored with UC Berkeley’s prestigious 2019 Berkeley Faculty Service Award for making a lasting and significant impact—particularly by helping the campus navigate complex financial and real estate issues.
The award is bestowed by the Berkeley Division of the Academic Senate on faculty whose “outstanding and dedicated service to the campus, and whose activities as a faculty member have significantly enhanced the quality of the campus as an educational institution and community of scholars.”
Wallace, the Lisle and Roslyn Payne Chair in Real Estate Capital Markets and chair of the Haas Real Estate Group, shares the honor this year with Spanish Prof. Ignacio Navarrete of the Department of Spanish and Portuguese.
“During the past 10 years, Nancy has devoted extraordinary time and energy to the campus’s day-to-day well-being,” wrote Anthony Long, chair of the Academic Senate’s Committee on Faculty Awards and an emeritus professor of classics and literature.
Wallace, a prominent expert on the residential mortgage market, mortgage-related securities, and pricing models, helped the campus with a “series of onerous financial issues,” including the budget for intercollegiate athletics, advising on strategic banking relationships, and a sustainable funding model for the Lower Sproul Plaza redevelopment project.
In 2008, she was recruited by the UC Office of the President to serve on the Systemwide Committee on UC Faculty Mortgage Programs. She was also drafted to play a major role in the financial planning for Memorial Stadium, helping to deliver a blueprint for expanding the stadium’s uses.
Prof. Candi Yano, Haas Associate Dean for Academic Affairs and Chair of the Faculty, along with Prof. Richard Stanton wrote in a letter of support that in addition to her campus service, Wallace goes far beyond herself at Haas.
“Very few faculty are so committed to the campus that they are willing to invest long hours and their intellectual prowess in improving the financial stability of the campus. We note that Nancy is equally dedicated in her service to the Haas School, where she has served as Chair of the Real Estate group essentially ‘forever’,” they wrote.
In addition to her service on campus, Wallace has served on the Federal Reserve’s Model Validation Council and the U.S. Treasury’s Financial Research Advisory Committee.
Unemployment is at its lowest rate in 50 years, there are almost 7 million job openings nationwide, and consumer confidence is at its highest level in a decade. There’s more venture capital flowing than at any point since 2000, and commercial real estate loan origination is at its highest point ever. So, what could go wrong?
“We’ve had a sugar high for the economy, and it will wear off,” said Rosen, delivering his annual forecast at the 41st Annual Real Estate & Economics Symposium in San Francisco this week. “We’re in the last stages of a very good recovery, but we’re buying this time by spending a lot of money that we don’t have.”
Even so, Rosen does not foresee a crash in the real estate market anything like 2004 to 2007 or the late 1980s, and there’s still plenty of “dry powder”—or cash available for investment, he said. While real estate is overvalued compared to historical prices, it’s not overvalued compared to everything else, he said.
“This is not a very dramatic forecast, but the risks have risen dramatically and this is just the beginning of volatility,” he said. “There will be correction, and the Bay Area is likely to have a bigger correction than the rest of the country, because we’ve gone up so much.”
“A sledgehammer to break open a walnut”
Rosen pointed to rising interest rates, a ballooning national deficit, increasingly restrictive immigration policies in a tight labor market, and the escalating trade war with China as trouble signs. With $250 billion in tariffs imposed and $257 billion more threatened by President Trump, Chinese retaliation is to be expected.
“We certainly have problems with China, but tariffs are an exceptionally a blunt tool. It’s like using a sledgehammer to break open a walnut,” said Rosen, who is also chairman Rosen Consulting Group, a real estate market research firm. “No one wins in a trade war.”
The combined economic stimulus of tax cuts and increased spending has overheated the economy, and left few tools in policy makers’ arsenal to recover from the next recession, he said. A gridlocked Congress would not be able to pass a spending increase bill, or another tax cut. “In a full employment economy, the deficit should be zero or positive, so we should be at a balanced budget today. We’re doing the opposite. We’re not going to be ready for the next big downturn.”
While he had plenty of critiques of President Trump and his administration, he said Congress is also at fault. “There are no fiscal hawks any more. There’s no one who believes in balanced budgets.”
In the immediate future, however, the economy remains red hot. There’s a boom in job creation nationwide, especially throughout the West. California as a whole is a bit lower than the rest of the region, but it still had 1.9 percent growth in job creation year-over-year. Unemployment in San Francisco hovers just over 2 percent.
“The tech cities are going strong: Seattle, Austin, Silicon Valley, Denver, San Francisco, and Oakland are still very strong. The only thing constraining these places is the fact that housing is so expensive that they can’t get people to come. We’d be growing faster if we can solve some of those issues.”
Real estate forecast
Nationwide, retail is still struggling while industrial properties are hot, with vacancy rates at their lowest point since the 80s. “It’s a red-hot sector because of e-commerce, which is driving the demand for this space and bypassing retail network.”
In terms of commercial real estate, Rosen predicts cap rates—or the rates of return on commercial property—are expected to rise after historic lows. He warned the crowd of 300 real estate and finance professionals in the room to not be too smug. “We’ve had big periods of appreciation in the last decade because cap rates went down. Don’t think it’s because you’re smart—it’s because they repressed interest rates. It’s going to reverse. We’ll have headwinds.”
His advice? “As a lender, I’d say now’s the time to be cautious. Don’t lend to inexperienced people. You’ve got to be able to hold through the next six years—don’t think you’re going to miss this recession,” he said. “As an investor, it’s now is the time harvest or hedge, don’t wait for the next cycle.”
Nationally there’s strong demand for office space, but it’s nothing like previous booms. And vacancy rates have stopped going down because businesses need less space per worker—thanks to open floor plans and co-working spaces.
“The WeWorks of the world are 50 percent more dense than traditional office spaces,” he said.
Although the rental market peaked several years ago and home ownership is creeping back up, rental vacancy rates are low. The proportion of young adults living with their parents has begun to drop from a high of 32 percent in 2016. In the Bay Area, apartment vacancy rates are below 4 percent, and rents are rising again after appearing to top out.
California—a victim of its own success?
California homes have become increasingly unaffordable–just 30 percent of people can afford a median priced home, compared with 50 percent nationally. In the Bay Area, prices were up almost 10 percent year-over-year in September. Recently, however, there are signs that home prices may be beginning to drop—whether it’s due to rising interest rates or people leaving the region.
All this leads Rosen to believe California may soon be a victim of its own success.
We can expect “extra innings” out of the robust real estate economy of the past several years, but all signs indicate we’re approaching the end of the cycle, according to Kenneth Rosen, faculty director of the Fisher Center for Real Estate & Urban Economics.
In his annual real estate and economic forecast last week, Rosen also pointed to red flags for California in the proposed GOP tax plan, which he calculated will take a $38 billion bite from taxpayers if the state and local income tax deduction is eliminated. That translates to a 2% to 3% reduction in the state’s economy, he said.
“One-third of people in California are going to face a tax increase that’s going to be quite substantial,” Rosen said. “There are also a number of provisions that will hurt housing, including the property tax deduction limitation and limitations on mortgage interest deductions.”
Peak moment or extra innings?
Rosen’s wide-ranging forecast, presented at the Fisher Center’s 40th Annual Real Estate & Economics Symposium on Nov. 20, was titled “Peak Moment or Extra Innings?” and covered everything from the end of artificially low interest rates to the Bitcoin bubble to an expected uptick in home ownership rates and housing starts.
“It’s important to say that unlike the late 80s or 2004 to 2007, we’re not at a point where real estate values are about to crash. They crashed then because real estate was too expensive relative to everything else—today it’s relatively fairly valued,” he said. “I think we’re going to see a correction, but my best guess is we’ve got extra innings, a couple more years.”
Rosen said that the “easy money” we’ve had for almost nine years, due to very low interest rates, has created an asset bubble that will come to an end when rates are normalized. But he believes it would take a true shock to the system—a geopolitical event such as a sharp increase in oil prices—to throw the country back into recession.
“Now is the time to harvest. You’re not going to see better pricing,” he told the audience of developers and real estate professionals at the Westin St. Francis in San Francisco.
Industrial is the new retail
In terms of real estate, returns on office, retail, and apartments—especially luxury apartments—have already cooled, while the one area that remains hot is industrial spaces. Retail REIT stock prices have fallen 20 percent in the past year, while industrial REITS are up 20 percent, he said.
“Industrial is the new retail,” Rosen said, noting that 60 percent of new warehouse construction is coming from Seattle-based Amazon. At the same time, he predicted massive retail store closures in 2018—again driven by Amazon and other e-commerce outlets.
“There’s a big restructuring happening. Cannibalization is what we call it, and the cannibal lives in Seattle,” he said.
Rosen peppered his presentation with barbs aimed at Trump administration policies, including its anti-immigration stance—which will increase construction labor shortages and hurt the rental market—and its budget plan, which will swell the deficit to $700 billion or more, he said.
“This is a widespread, full-employment economy. The last time we had a full-employment economy, we had a budget surplus, so I think this is just a mistake,” he said. “The deficit hawks seem to have disappeared.”
Tax plan hit to California
Rosen recently completed a paper on how the GOP tax cut plan will impact California, looking in detail at the effect of eliminating state and local tax deductions. Such a policy would impact 45 million Americans, disproportionately in California as well as other high-income states like Massachusetts and New York, he says.
Assuming a 35% federal tax rate, Rosen estimated that middle- and high-income Californians would owe an additional $37.9 billion in taxes. He translated that to 2% to 3% drop economic activity in the state, including thousands fewer jobs as well as reduced local sales and property tax revenue for municipal and state governments.
Even if it’s offset somewhat by lower federal tax rates, Rosen said that the plan makes California even more tax disadvantaged relative to other states. “The long-run impact of this worsening relative tax differential means that the tax motivated out-migration from California will accelerate,” he wrote.