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On the Hot Seat

Commercial space provides eye on economy

(Erik Jacobs for The Boston Globe)
April 19, 2009
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These days, David Slye spends his time seeking solutions for companies in chaos. As managing partner of the global real estate services firm Jones Lang LaSalle, Slye's job takes him inside the offices of the city's largest companies as they consider their space needs and the future of their organizations. Today those decisions are as complex as ever. Slye sat down recently with Globe reporter Casey Ross for a wide-ranging discussion about Boston's real estate market, its evolution, and the vagaries of the economic downturn.

You have a bird's-eye perspective on the economy because you deal with a lot of different companies and their space issues. How widespread is the pain and how are companies dealing with it in terms of their real estate?

The guys having the toughest time are the financial firms. They're so involved in figuring out their business strategy, they're letting headquarters deal with most of the outside issues. And right now, real estate is one of those outside issues. The decisions are coming out of the [chief financial officer's] office. So we come in there as partner to help them find ways to be more efficient.

When do you see things starting to turn around in commercial real estate?

I think you're in the latter half of 2010 and more so in 2011. I don't think we've seen the last of the layoffs. Projections are 130,000 more jobs [lost] in Massachusetts. And our business is all about rear ends in seats. If those layoffs continue, that will put more stress on the market. Still, walking around offices you're only seeing dribs and drabs of space available, not huge chunks of it. We're not a headquarters city anymore, so it hasn't affected us the way it has in some of the other markets.

How do you think real estate firms will weather the downturn?

In the last downturn, tenants overleased and landlords overbuilt. This time around, people were much more conservative in the space they took. So the saving grace of this market is the start-ups and midsized companies, it's not the giant firms. The reason Boston's commercial real estate market is not devastated right now is because little companies are still growing.

Were you surprised by the foreclosure at the Hancock Tower? (Since this interview, the Hancock was sold at auction to Normandy Real Estate Partners.)

Not really. It got stuck in the height of the market. I think it's unfortunate because the building needs some investment. The real opportunity is going to come with the next guy that owns it.

Is the Hancock a victim of typical market cycles, or were there peculiarities to this downturn that made it more susceptible to foreclosure?

In other market cycles, buildings were taken back (through foreclosure). But it was a transparent process: I'm a bank. You borrowed from me. I'm going to take your building if you don't pay me. What's different about this market cycle is the securitization of the thing, the levels of mezzanine debt. It's so complex that even the guys who own the debt don't know what they own.

Do you think that level of complexity is inherently a bad thing?

The securities business is what helped drive us out of the last recession. It was some smart guys who figured out a way to get some loans out when no one was lending. So it got the engine going again. I thought it was a great idea. But the longer it goes on and the more ways you cut it, and the fancier you get . . . I don't know if it's right to call it greed, but as a real estate person, it's not a really effective way of taking care of an asset, because you're more worried about paying your six levels of debt than investing in the building. I think what we're finding is that the pendulum swung, it got out of control and there wasn't regulation where it needed to be.

Do you think securitized lending will ever come back as a way of financing real estate transactions?

I think for a while it's over as a way of transacting anything. It's going to get regulated. If you look at the primary investment bankers, they all became general banks, so they can't even do it now. The smart guys will figure something out, but it will be a little more regulated, loan to value won't be as crazy. Values will be true values again. People will be looking at the real estate and they'll know what they're buying.

Trillions of dollars are being flooded into the banking system, and so far banks are not lending at the levels they were previously. Do you think they ought to be at this point, or do we need to give the bailouts more time to work?

There were a lot of banking institutions where the government came to them and said, "We're giving this out, you gotta take your $8 billion." It suddenly put all those institutions into one category, and they didn't really need to go there. The government didn't really think through who needed money and why. The guys who aren't lending still don't know what their balance sheets look like, so it's tough to get them to lend when they've got auditors all over them.

So when do the parts of your business that rely on lending start to pick up again, particularly investment sales?

The next 12 to 18 months are going to be tough, but I think there will be funds and organizations that will lend money for real estate and allow the sales transactions to start kicking in. There are a lot of guys with a lot of money sitting on the sidelines. We haven't had a deep enough of a downturn to get those guys interested. The values have not come down enough.