The common denominator among the real estate executives chosen to be included in our second annual “Ten to Watch” feature can be summed up in one word: boldness. Their vision and willingness to take calculated risks sets them apart from the stewards of the commercial real estate industry. In the case of Larry Silverstein, resiliency is another distinguishing characteristic. The president and CEO of Silverstein Properties, leaseholder at the former World Trade Center site, plans to rebuild about 11.7 million sq. ft. of commercial space at Ground Zero following the 9/11 tragedy. In December, a federal jury ruled that the WTC destruction constituted two separate events, paving the way for Silverstein to receive up to $4.6 billion in insurance proceeds. Silverstein is keenly aware that the world is watching and that his legacy will be determined by what's rebuilt at Ground Zero.

Most other members of this year's “Ten to Watch” class enjoy much less public scrutiny and are making their mark in different ways. Robert White, founder of data research firm Real Capital Analytics, has carved out an important information niche by providing comprehensive sales transaction data that wasn't available to investors just six years ago. William Passo, president and CEO of Passco Real Estate Enterprises, is a true pioneer in the 1031 Exchange arena, which enables sellers to defer capital gains by plowing the proceeds into new investments. Mike Bush, meanwhile, continues to champion the cause for greater racial diversity in commercial real estate as leader of the Real Estate Associate Program founded in 1997.

Several owners and developers also made this year's list, the result of large transactions and bold initiatives. Scott Wolstein, CEO of Developers Diversified Realty, leads one of the fastest growing shopping center companies in the U.S. and which recently spent $1.15 billion for a portfolio in Puerto Rico. The hospitality sector is back in favor with investors and Kimpton Group Holding LLC, led by CEO of Real Estate Michael Depatie, is in a major expansion mode. Industrial giant ProLogis, the nation's largest industrial owner, has a new CEO at the helm, Jeffrey Schwartz, who possesses strong international experience. In the apartment sector, Essex Property Trust, led by Keith Guericke, continues to demonstrate an uncanny ability to outperform its industry peers.

Rounding out the “Ten to Watch” are two executives in the brokerage business. Jones Lang LaSalle raised a few eyebrows last year when it named Colin Dyer, a virtual outsider in commercial real estate circles, as CEO of its global empire. Dyer's international experience is a clear indication that JLL sees opportunities overseas. Over at CB Richard Ellis, Christopher Ludeman takes over as the new president of U.S. brokerage. The move marks Ludeman's second stint with CBRE. One of Ludeman's challenges will be to help retain top producers, some of whom have gone to rival firms or struck out on their own.

These veteran heavyweights can't rest on their laurels because the pressure to perform at a high level has never been greater in an industry that's evolved from Main Street to Wall Street. Collectively, their stories give us insight into the state of the industry in the 21st century.

Larry Silverstein, President and CEO, Silverstein Properties

Six weeks before September 11, 2001, Larry Silverstein had finally reached the pinnacle of New York's real estate establishment. Nearly five decades after he joined his father's small leasing company, Brooklyn-born Silverstein had made the winning, $3.2 billion bid (with Westfield America) for the 99-year leasehold on the World Trade Center. He owned one of the most recognized real estate trophies on the planet.

At 70, with two adult children working at the company, Silverstein had earned the right to kick back, reflect on his amazing only-in-New York story and consider retirement.

But as he watched the towers collapse from his Fifth Avenue office on 9/11, Silverstein knew that the last chapter of his life was being rewritten. “The rebuilding is a challenge for 10 lifetimes,” he explains. “I'm going to spend the rest of my life — that is, the rest of my working life — getting this done.”

A Repeated Gamble

This won't be the first time that Silverstein has staked his reputation and his company's future on the World Trade Center. In 1980, Silverstein was a moderately successful landlord, with a few trophy properties such as 529 Fifth Avenue and 120 Broadway.

But he wanted to be a builder too, so in 1980 he bid for the rights to build 7 World Trade Center, slated to rise on the north end of the 16-acre Trade Center site. He built the 47-story, $300 million building on spec and opened it in 1987. That same year, Silverstein landed a big tenant when Salomon Brothers leased half of the building's 2 million sq. ft. A string of leases followed in the years ahead, propelling Silverstein into the top ranks of Manhattan landlords by the mid-1990s.

It's now 2005, and again 7 World Trade Center will play a critical role. A new building is now nearly completed on the site of the original tower that was destroyed on 9/11. There were no people trapped in this building, unlike the Twin Towers, when it collapsed.

Again, Silverstein is developing on spec. The only committed tenants are Silverstein Properties, which will relocate to the 1.7 million sq. ft. building early next year, and leasing agent CB Richard Ellis, which will lease 20,000 sq. ft. Silverstein's firm will lease 40,000 sq. ft. of the building's office space. Silverstein says that “meaningful discussions” with other potential tenants are taking place.

Like last time, the fate of development on the World Trade Center site largely depends on the fate of the lower Manhattan market. The third largest office market in the U.S. (behind only midtown Manhattan and Chicago on the basis of inventory), downtown has struggled for decades to retain top corporate and financial tenants. Vacancies soared as high as 17% after 9/11, thanks to heavy job losses on Wall Street.

Silverstein, speaking from his Fifth Avenue offices, scoffs at the notion that rebuilding downtown will yield anything short of success. Over the next eight years, Silverstein Properties will bring more than 11 million sq. ft. of space to a market where the vacancy rate for all classes of space was 13% in early 2005 vs. 10% in midtown.

“There's about 150 million sq. ft. of office space in lower Manhattan,” says Silverstein. “So when you consider that we're bringing back 11.7 million sq. ft. over nearly 10 years, it's a drop in the bucket.” CoStar Group data shows that the lower Manhattan office market actually contains 102 million sq. ft. of all classes of office space. During the late 1990s, the combined Manhattan market — with roughly 500 million sq. ft. of inventory, according to CoStar — absorbed as much as 12 million sq. ft. of new space a year.

And, this time, Silverstein's projects are part of a massive rebuilding that will funnel $13 billion into lower Manhattan. That figure includes some $5 billion to develop new transit facilities that will make the area more attractive to tenants whose workers must commute from the suburbs.

Near term, however, Silverstein is betting on something even sweeter to lure tenants to 7 World Trade Center: cheaper rents for Class-A space. Asking rents will be around $50 per sq. ft., which could be 50% less than midtown Class-A office space in 2007, predicts Silverstein.

While it's too early to project rents for the Freedom Tower, Silverstein says he has the potential to undercut competitors there, too. How so? Because after a nearly three-year legal battle, he convinced the courts that the 9/11 attack constituted two events, rather than one. The insurers had argued it was one incident.

That means Silverstein can collect as much as $4.6 billion in insurance. The project will also be eligible for $3.5 billion in Liberty Bond financing, which further lowers the cost of financing the projects. The combination could leave Silverstein in need of little or no financing as he rebuilds.

Still, Silverstein has to fill his buildings and that assumes that demand in the downtown market will be stronger tomorrow than it is today. If there is a warming trend, it's difficult to detect so far: Class-A office vacancy in lower Manhattan was running at 13.4% in January — an increase of 20 basis points over January 2004. Meanwhile, average asking rents closed January at $33.66 per sq. ft., reports brokerage Colliers ABR. That's an improvement, albeit small, over the $33.56 per sq. ft. asking rents in December 2004, but it proves that the market has a ways to go until Silverstein's $50 per sq. ft. rents aren't viewed as rich.

A 24/7 Community

Ultimately, the fate of the Trade Center development and the downtown market hinge on transforming the area into a credible rival to midtown. That means more amenities, more recreation and more reasons for people to stick around after work. Part of that process is already under way as unwanted office space — typically outdated — is converted to residential use. According to Cushman & Wakefield, 8 million sq. ft. of downtown office space has already been converted.

“This is the fastest growing residential neighborhood in the city. People are moving in down here and it's becoming 24/7,” says Silverstein.

Downtown's other major drawback — its limited connections to commuter trains — could be eliminated at a rebuilt transit hub where three subway lines bring in 14 different trains from other parts of the city and the PATH trains from New Jersey. Plans are on the drawing boards for a critical missing link: a new terminus for the commuter rail lines that serve the northern suburbs and Long Island and now end in midtown. There are also plans for ferry landings and connections to all three area airports.

“What you have here is a combination that's nothing short of spectacular,” says Silverstein. “This is an unprecedented amount of money being invested in a very small area.”

For now, Silverstein is focused on completing 7 World Trade Center and beginning work on the Freedom Tower. In February, concrete was poured into the Freedom Tower's foundation. His legacy, he says, will include innovations in design that will prevent the kind of catastrophic failure that occurred when the Twin Towers were hit. “These buildings will be the safest office buildings in America,” declares Silverstein.

Take, for example, 7 World Trade Center, where the building's core is encased within a reinforced concrete shell. Unlike most concrete barriers, this one is two-feet thick and can withstand 12,000 pounds of pressure per square inch. Regular concrete wouldn't stand a chance against such pressure.

Its core rather than its exterior walls supports this building. That's an important detail: the original World Trade center towers were held up by their exterior walls. Engineers theorize that was a fatal flaw after the 9/11 attacks when the floors collapsed in both towers.

“This is the hardest and most dense reinforced concrete out there,” says Silverstein. Within the building's two-foot thick walls of concrete will be 70 tons of steel reinforcing bars, which will be built into the core of every single floor of the 52-story tower. The stairs consist of dense concrete capable of holding 8,000 pounds per sq. inch. Not only are the stairwells stronger, they are also 20% wider than standard stairwells. The reason? On 9/11, firefighters climbing up the stairwells impeded the flow of people trying to descend the stairs

Another safety measure that Silverstein will improve is the fireproofing. Unlike the previous sprayed-on fireproofing in the World Trade Center that flaked off and contributed to the structural failure, this material is 10 times more adhesive and dense.

Many of the life-safety measures taken at 7 World Trade Center will be magnified at the Freedom Tower, the 1,776 ft. tall building that will be the centerpiece of the redevelopment. Here, unlike at 7 World Trade Center, the cement encasing the core will be three-feet thick rather than two. “We'll be one of the first tenants in 7 World Trade Center, and I know that we'll be safe and comfortable in that knowledge,” says Silverstein.

He appears to relish this unexpected challenge that has arrived late in life. He remains amazingly optimistic in the face of adversity. “Coping with the responsibility is not an issue. I simply recognize the enormity of this challenge,” Silverstein says. “My health is good and my energy level is high. As long as I stay in good health, I want to make sure this [Freedom Tower] is developed properly in the way that the world wants it developed.”
— Parke Chapman

Mike Bush, Executive Director, Project REAP

Mike Bush gave up his post as vice-president of real estate for Giant Foods in 2000 to fulfill a vision of diversity.

Over the years the industry veteran and Harvard law grad, also an adjunct real estate professor at George Washington University, watched other professions absorb talented minority candidates while commercial real estate lagged.

To address the shortfall, Bush had launched the Real Estate Associate Program (REAP) in 1997. But he soon realized REAP needed his full attention to set it apart from less substantive “feel-good” programs.

So he “retired” to cultivate REAP in Washington, D.C., in office space donated by the Urban Land Institute, which offers annual operating money and staff support. Soon, an Atlanta version of the demanding classroom/networking program was added. Later this year, New York will come on line, followed by future programs in Chicago, Los Angeles, Miami, and either Dallas-Fort Worth or Houston.

Thus far, Bush has helped place two dozen highly skilled minorities into prominent mainstream firms. “We're not marketing affirmative action,” Bush says. “We are in the business of marketing talent. That's why the industry been so responsive. REAP adds bottom-line value.”

But progress comes in baby steps. The percentage of minority professionals “is still well under 1,000 in an industry of perhaps 100,000.”

Bush, 61, always had a bent for community service. “My Jewish upbringing… taught me that each person must work to make the world better, and each has a unique way to serve his fellows,” says Bush.

REAP courses are taught by real estate companies in nearby university classrooms and include weekly three-hour classes for 18 weeks. Courses focus on enhancing net-operating income, tenant retention and marketing, leasing and renovation strategies. The average student is about 30, holds a bachelor's degree, has some business experience, and was picked from 200 applicants.

Women comprise half of each class. From each 25-member class, five are selected to serve in 12-month, on-the-job associate programs, and those employers usually opt to keep the candidate permanently, Bush notes.

Traditionally, real estate industry jobs are gained through friends, family and personal contacts, and those networks have been mostly white. REAP's goals “are basically commercial real estate's goals,” emphasizes Bush, “and that's to change the profile of the business and take advantage of a talent pool that's traditionally not had access.”

Industry heavyweights like Cushman & Wakefield, Simon Property Group, Jones Lang LaSalle and Wal-Mart are on REAP organizing committees, and have hired graduates. Simon, in fact, has plucked three associates, including Bryon Wall, who is now the assistant mall manager at the Indian River Mall in Vero Beach, Fla.

Irv Kravitz, Simon's senior vice president of human resources, says Bush's approach to building REAP has been prudent. “It's a great success story,” he says. Kravitz is quick to add that Bush “is a tireless worker who truly believes in what he's doing.”
— Steve McLinden

Michael Depatie, CEO of Real Estate, Kimpton Group Holding LLC

Michael Depatie first took notice of Kimpton Hotels & Restaurants about 15 years ago. At the time, he was a senior executive at Residence Inn Co. and had just helped sell that chain to Marriott for $260 million. Depatie then turned his attention to growing Summerfield Suites, a company that he co-founded. (Wyndham International acquired Summerfield in 1998 for $263 million.)

Through the years, however, Depatie never lost sight of Kimpton, the San Francisco-based hotel company known for its stylish, boutique properties. He watched Kimpton as it propelled the boutique trend into a competitive hotel segment. In 2003, Depatie finally joined the company he had been tracking closely, becoming its CEO of real estate.

The hotel industry was in the doldrums and the executive team at Kimpton was beaten down, recalls Depatie. Yet, he brought a new perspective to the company and helped usher in a seasoned development team. “When I joined the company in March 2003, the industry and the company were just coming off a difficult time precipitated by the events of 9/11, the Iraq War and the economic recession. Fortuitous timing allowed me to come in fresh,” says Depatie, adding that the new management team helped steer the boutique leader on its current growth path.

Kimpton now has 40 hotels and is expanding. With 2004 sales of $400 million, up from $350 million in 2003, the company plans to add at least three to five properties a year in major markets, including New York, Boston, Chicago, Washington, D.C., and Miami. Depatie works closely with chairman and CEO Tom LaTour and the company's real estate team to scout out buildings that can be converted into hotels. He also keeps an eye out for new construction opportunities and third-party management contracts.

“Clearly it is the right time to be making acquisitions, given the very favorable supply-demand dynamics in the industry, especially in the major urban centers,” says Depatie.

Indeed, the boutique leader is on a roll. Occupancy rates rose to 68% in the fourth quarter of 2004, up from 64% during the same period in 2003. RevPAR (revenue per available room) during the same period rose from $87 to $102, a 17% increase, according to the company. But no matter how big Kimpton gets, Depatie says the company will remain true to its roots by personalizing guest experiences.

Attention to detail has been a hallmark of Kimpton's success, adds Arthur Buser, managing director at Jones Lang LaSalle Hotels. It's the extra touches — like making sure guests get low-carb bars, yoga mats and Fiji water — that have helped Kimpton stand out from the pack, he says.

“People that want and expect four-and-a-half star service get this,” says Buser, “plus something a little special and different at a Kimpton hotel.”
— Robyn Parets

Colin Dyer, President and CEO, Jones Lang LaSalle

Though Colin Dyer had routinely bought, sold and leased stores and other property in his 20-plus years of managing diverse global businesses, his newest post puts him at the helm of a real estate outfit for the first time.

But what a way to “break in.” Suddenly, the new president and CEO of Chicago-based real estate services giant Jones Lang LaSalle finds himself overseeing 17,000 employees, $23 billion in assets under management and more than 100 different company markets on five continents.

What Dyer lacks in nuts-and-bolts industry experience is more than compensated for in other qualities, says Sheila Penrose, JLL's chairman of the board, who led the CEO search. Dyer's entrepreneurial background, knowledge of local business practices internationally and a history of running successful companies give him ample vision to steer JLL through international and cyclical waters, Penrose says.

Dyer's extensive business background in Holland, France, Belgium, England, The Netherlands and other countries should also help the company focus on the intricacies of local markets abroad, she adds. “Understanding local markets is absolutely key to maintaining a strong local presence around the globe.”

Not surprisingly, JLL, a publicly traded brokerage, leasing, portfolio-management and advisory firm, continues to chart a decidedly international path in 2005 and beyond. Though cautious in divulging specifics, “we're happy to say it's a growth-oriented strategy,” Dyer notes.

Of course, Dyer joined a company with already strong global momentum. In 2004, for example, 37% of the company's total revenues stemmed from operations in Europe, followed by the Americas (31%) and Asia/Pacific (19%). LaSalle Investment Management accounted for the remaining 13% of revenues.

Wall Street appears to approve of the job Dyer is doing. JLL's stock price as of Feb. 18 registered $41.23 per share, slightly below its 52-week high of $43.61 but nearly double its 52-week low of $22.

The investment community expects Dyer to expand JLL's less-cyclical services, and the CEO likely won't disappoint. Veteran observers point to JLL's continued growth in the corporate real estate outsourcing arena.

The JLL chief emerged into the limelight after stints as CEO of WorldWide Retail Exchange, an Internet-based supply-chain firm owned by 40 of the world's top retailers and manufacturers, and Courtaulds Textiles, an international clothing and textile company operating in 17 countries..

Dyer, who officially took the reins of JLL last September, says that his European experience has taught him to respect other cultures and deal with their nuances. It helps that he speaks French, Dutch, German and Italian and a smattering of other languages.

Dyer spent much of his time in his textile and clothing days “restructuring organizations in difficult environments. After that, nothing frightens you.”

Penrose characterizes the CEO as a clear thinker and communicator with an excellent strategic mind and focus on execution. “Colin really respects and values others and recognizes their talent,” says Penrose. “He sets clear direction and gives (colleagues) plenty of running room.”
— Steve McLinden

Keith Guericke, CEO, Essex Property Trust

In 1997, other West Coast apartment companies noticed the growing tech boom and did the smart thing, buying apartments in San Francisco and Seattle. That same year, Essex Property Trust did what in retrospect was an even smarter thing: the real estate investment trust (REIT) bought heavily in southern California, which at the time was just recovering from a deep recession.

“We were fairly positive that was going to be a better market to be in than northern California and Seattle,” recalls CEO Keith Guericke. Over the next seven years, he raised the firm's apartment holdings in southern California from 15% to 57% of the portfolio — and the region went from being one of the coldest to one of the hottest apartment markets in the country.

A lucky call? Maybe. But as Barry Vinocur, editor of the Realty Stock Review says, “These guys have been too lucky to say that they're lucky.” According to Vinocur, the Palo Alto, Calif.-based REIT has the best record of any apartment company. Now with a market cap of $1.9 billion, Essex has delivered an average total annual return of 24% to its shareholders since 1994, even as the companies in the Bloomberg Real Estate Apartment Index brought home an average of 6.2% a year.

That's why eyebrows were raised last year when Guericke began selling properties in southern California and buying in the Bay Area and Seattle, where the 56-year-old says they see strong job growth and rent growth over the next few years. In the last quarter alone, according to Guericke, a $700 million sale to United Dominion reduced Essex's holdings in southern California from 57% to 50% of its 25,000-unit portfolio.

In the Bay Area, Essex is looking at properties near San Jose, Santa Clara, Sunnyvale, and downtown Oakland, which are places it anticipates the most new jobs. “A homeowner will commute for an hour because he has to in order to afford the home, but a renter is going to want to live within about 15 minutes of where he works,” Guericke says.

One of Guericke's hallmarks in his 17 years as Essex's CEO has been to keep the firm's strategy simple. The firm has always focused on West Coast apartment markets with high barriers to entry. Even in its financing, the company wants simplicity. Essex prefers 10-year, fixed-rate Fannie Mae and Freddie Mac loans for most of its financing, which keeps the firm's cost of capital at an interest rate under 5%. The company also works with institutional investors, who invest in the firm through closed-end funds.

“From a company standpoint, I love Keith Guericke,” Vinocur says. Guericke reminds him of the great, low-key quarterback Johnny Unitas of the Baltimore Colts, an unassuming guy who just somehow “keeps putting numbers on the board.”

Guericke credits much of the firm's success to his close-knit management team, many of whom have worked with him for nearly 20 years. “I have a lot of smart guys who work for me and I listen to them.”
— Bennett Voyles

Christopher Ludeman, President, U.S. Brokerage, CB Richard Ellis

The new president of U.S. brokerage for CB Richard Ellis has firsthand knowledge of the principal side of real estate. In 2002, Christopher Ludeman departed the friendly confines of CBRE after 22 years as a top sales broker in order to establish his own real estate investment company. The Phoenix-based firm that he founded bought roughly 700,000 sq. ft. of office space in Phoenix, Denver and Las Vegas between 2002 and 2003.

“It was a wonderful experience over the past two years to actually go out and buy assets,” says Ludeman. Late in 2004, however, his former employer made him an offer he couldn't refuse: rejoin as head of the firm's single-largest business line.

Times have changed since Ludeman, 46, left CBRE. For one thing, CBRE is no longer a private company — the firm went public in 2003, trading under the ticker symbol CBG. Major changes have ensued. “This company has become much deeper in its service lines. There have also been several strategic hires within the past two years,” notes Ludeman, who will be working from CBRE's Los Angeles headquarters office.

Ludeman is taking the reins as property fundamentals are rebounding and the investment sales market is scorching hot. During the fourth quarter of 2004, for example, CBRE revenues hit $798.2 million, up 28.5% from the $621.3 million posted one year earlier. Investment property sales fueled much of that revenue increase. Also, during the fourth quarter, AMB Property Corp. hired CBRE to manage its 25 million sq. ft. industrial portfolio in California.

Like his predecessor Mitch Rudin, Ludeman favors the “managed brokerage” concept. He describes the model as a group of brokers acting as consultants to one another. “It's like a 440-meter relay race where everyone has to run well, and the baton pass has to go smooth.”

Ludeman will be based on the West Coast, but he insists the move isn't symbolic of a power shift at the firm. Rudin, who worked for Insignia/ESG, which merged with CBRE two years ago, was based in Manhattan. Ludeman believes that one of CBRE's strengths is its distributed leadership. CBRE's eastern division head is based in Washington, D.C., while its investment sales group is run out of the Chicago office. “There's simply no aggregation of powerful positions in Los Angeles.”
— Parke Chapman

William Passo, President and CEO, Passco Real Estate Enterprises

William Passo is a real estate revolutionary. Never content to give clients the status-quo treatment, Passo, president and CEO of Passco Real Estate Enterprises of Irvine, Calif., and an attorney, has demonstrated he'll take an investor's case all the way to Washington, if need be.

In fact, Passo did just that. One of the early proponents of the 1031 Exchange, which enables investors to place proceeds from a property sale — tax deferred — into other real estate. Passo traveled to the nation's capital in 1994 to seek approval from the IRS for his client to buy just a partial interest in a property as part of an exchange.

Passo, then the top exec of TMP Investments, a real estate investment and management firm, walked away with an unofficial blessing for his idea. That bold stroke marked the very first tenant-in-common (TIC) structure, which the IRS didn't validate formally until 2002. “It's a billion dollar-plus industry now, and we have done over 300 of these fractional ownership deals,” he says.

Passo continues to make industry headlines with his own seven-year-old firm, Passco, a full-service real estate firm offering investment advisory and 1031 sponsorship services. He closed on the purchase of Puente Hills Mall in the City of Industry, Calif., for $148 million in an eye-opening 2003 deal that pooled 31 TIC client investors. The transaction, he recalls, “made the brokerage and financial communities stand up and take notice.”

Since then, Passo, 63, has persuaded conduit lenders nationwide to recognize TICs, opening the door for further 1031 investment. “We had to educate quite a large number of lawyers in the process.”

It's not as though Passo couldn't speak legalese. After earning his J.D. from UCLA, Passo practiced law from 1967 to 1985, specializing in real estate syndications and securities. “One day I looked up and said, ‘I think I'm as smart as some of my clients.’”

So he formed TMP in 1978, partnering with Anthony Thompson, another 1031 innovator, now CEO and chairman of Triple Net Properties.

The client in that Passo-goes-to-Washington TIC deal, Webb Morrow, has since orchestrated 25 TIC deals with Passo. “William is a square shooter and I have a lot of confidence in his ability,” says investor Morrow, 83. “He'll take your case to heart and do everything correctly along the way.”

There's no standing still for Passo, who expects his firm to more than double its 2004 TIC volume of $100 million in 2005. His Passco firm, which employs 71 people, is designing a product that would funnel 1031 Exchanges through a Delaware Statutory Trust that would own property. Until a recent IRS ruling, such vehicles had been considered partnerships, making them ineligible as like-kind exchanges.

“We've got to keep moving ahead,” says Passo. “Real estate, like all industries, must be in a constant state of evolution.”
— Steve McLinden

Jeffrey Schwartz, CEO, ProLogis

Not many real estate executives have had the opportunity to build a genuinely global business one continent at a time. Even fewer have done it and then gone back to headquarters to run the business.

After spending the last nine years living in Mexico, Europe, and then Asia, building ProLogis into the world's largest warehousing real estate investment trust (REIT), 44-year-old Jeffrey Schwartz is back in Aurora, Colo. His new post: CEO of a $15.8 billion, 291 million sq. ft. global portfolio of warehouses and distribution centers.

Schwartz says he learned a lot in his foreign assignments, the most recent of which was serving as president and COO of the Asia division of ProLogis. “You become a lot more culturally sensitive,” he says. “You realize that sometimes the best ideas are coming from your guys in Japan…from your guys in the UK, sometimes they're coming from the people in France or the Netherlands.”

But wherever Schwartz has gone, the warehousing industry has probably learned a thing or two from him. In 2004, 22% of all new warehouse leases in the United Kingdom went to ProLogis, according to Schwartz. Market share in France and Japan is similarly high.

And now ProLogis is becoming one of the first U.S. REITs to venture to mainland China, where it is undertaking three projects. Its latest announced project is warehouse space in the vast new deepwater port Shanghai is developing. The company has reserved 3.5 square kilometers on which it plans to build out 15 million sq. ft. of facilities.

The challenge now is to keep up the pace. Last year, company assets grew by 35%, thanks to its merger with Keystone Property Trust ($1.75 billion in properties) and the meteoric rise in investment within its region-specific property funds. Schwartz says that his main challenge this year is simply to “continue to execute the strategy.”

A CPA by training, Schwartz likes the warehouse business for the same reasons that other developers don't. “It's not a sexy business,” he admits. “What we like about the business is it's all about functionality, it's not about asethetics, and functional obsolescence in a well-designed building is minimal.”

But if warehouses are all alike, how can a company hope to build a competitive advantage? “It comes down to customer relationships,” says Schwartz. “When you have somebody in 40 locations or 20 locations or 10 locations, there's economies of scale for both parties. You're dealing with one supplier or vendor that they can depend on. They know that we will do what we say we're going to do.”

The second distinctive element: ProLogis supplements its own debt capacity with a number of continent-specific venture funds. Acquisition through these joint ventures has fast outpaced its organic growth over the last three years. Currently, $8.7 billion in properties are owned through the funds while another $6.1 billion are wholly owned by the company.

Tara Innes, a REIT analyst at Fitch Ratings, says ProLogis was one of the first companies to use this approach. “ProLogis has really led the way in its fund management strategy,” she says.

Innes says that bringing in Schwartz as CEO is probably an indication that the board sees most of its growth offshore. Schwartz, for his part, says that although the firm expects non-U.S. markets to be the fastest growing, the firm still has a lot of room to grow even in the U.S.

Although it's twice as large as its nearest competitor, ProLogis has just 5% of the U.S. market share and even less overseas.
— Bennett Voyles

Robert White, Founder and President, Real Capital Analytics

With property values skyrocketing from Boston to San Diego, more investors are turning their sights to secondary markets. To make sensible purchases, institutional buyers sitting in New York need accurate information about how prices compare in Austin, Texas to Raleigh, N.C.

Finding the data would have been difficult several years ago. Buyers would have been forced to ask brokers for a few comparable prices. But now investors can quickly get access to a wide range of vital statistics from Real Capital Analytics, a research and consulting firm in New York focused exclusively on the investment market for commercial real estate. “They provide a tremendous amount of information about who is selling and who is buying,” says Peter F. Korpacz, a director of PricewaterhouseCoopers in Baltimore.

Founded by Robert White in 2000, Real Capital has quickly gained a wide following. The list of subscribers includes all the top 20 national brokers and major lenders, such as GE Capital, Bank of America and Wachovia. What draws such an audience is comprehensive coverage of sales transactions, including prices and clear graphs showing trends in capitalization rates (the returns based on purchase prices). Readers, for example, can quickly learn the average price per apartment unit in Chicago and how many office buildings sold in Pittsburgh last year.

Having served as a broker for Eastdil Realty, White of Real Capital understands the hazards of markets and aims to arm his customers with the information that they need. In 2004, White provided data on $175 billion in deals $5 million or higher. This year he hopes to expand Real Capital's reach, beginning to track hotels and smaller deals of $3 million or so, which are of interest to lenders.

White is bullish on real estate and upbeat about the outlook for his company. “We are still seeing an inflow of capital into real estate from a wide variety of sources,” he says. “Institutions have a lot of money to spend, and they need information to guide their decisions.”

Besides providing raw numbers, Real Capital writes reports that offer vital context. A recent report on apartments noted that condo converters accounted for half of all the sales activity in some markets, including South Florida and Las Vegas. Such details help readers understand price trends; because they plan to sell apartment units one at a time, condo converters can pay higher prices than buy-and-hold pensions can afford.

By shining light on previously dark corners, Real Capital — along with other data services such as CoStar Group and Torto Wheaton Research — is helping investors make better decisions, says Mike Acton, director of research of AEW Capital Management, an institutional investment advisor in Boston.

The market downturn that began in the late 1980s can be partly traced to poor information, says Acton. Back then, developers built excess supply and many buyers overpaid. “The markets are more transparent now,” says Acton. “So, there is less likelihood that we will repeat the mistakes of the past.” That transparency can be directly traced to data providers such as White.
— Stan Luxenberg

Scott Wolstein, CEO, Developers Diversified Realty

Scott Wolstein has long focused on open-air community shopping centers. But Wolstein, who is CEO of Developers Diversified Realty (DDR), recently spent $1.15 billion to acquire a portfolio in Puerto Rico that includes several enclosed regional malls. Is the Cleveland-based real estate investment trust (REIT) changing its stripes?

Not at all, says Wolstein. Because of the hot Puerto Rican weather, some centers are enclosed. But the tenants include familiar big-box retailers such as Wal-Mart and Home Depot. “The tenant mix in Puerto Rico is comparable to what we have had in our open-air centers,” says Wolstein.

Whether or not the Puerto Rican purchase represents a break with the past, the acquisition is the latest in a series of bold moves by Wolstein. In 2004, DDR paid $1.3 billion for Benderson Development Corp., which owned 9.8 million sq. ft. in 53 projects. A year earlier, DDR acquired 15 million sq. ft. in a $1 billion takeover of JDN Realty.

Such purchases have enabled DDR to rank as one of the fastest growing players in its field, expanding from owning and operating 69 projects with less than 20 million sq. ft. in 1993 to 474 projects with 107 million sq. ft. today.

As his REIT expanded, Wolstein shifted with the times, benefitting from changes that helped make community centers a dynamic sector. When DDR went public in 1993, its typical center was about 300,000 sq. ft. and included a grocery store, discounter and pharmacy. Gradually the mix changed as traditional freestanding retailers foresaw the need to locate in community centers.

Today a typical DDR center has 1 million sq. ft. and includes a dozen boxes housing retailers such as Kmart, Best Buy, and Barnes & Noble. Wolstein is also attracting some brands, such as Eddie Bauer and Gap, which typically locate in enclosed regional malls.

While most quality regional malls are already held by REITs, analysts note that many community centers are in the hands of private owners who might welcome overtures from a consolidator. “Developers Diversified will continue growing at a substantial pace because there is plenty of stuff for them to buy,” says Richard C. Moore II, research analyst for KeyBanc Capital Markets in Cleveland.

Wolstein is cautious about forecasting when the REIT will make its next sizeable deal. He says that DDR is likely to make big purchases at irregular intervals, when sellers offer tempting prices. Still, he expects the REIT's assets to grow steadily. This will occur because the net operating income is increasing about 2% annually, and DDR invests much of its retained earnings into development.

The REIT plans to start about $300 million worth of new development annually. “Our business model allows us to grow at a 7% annual rate without doing any significant transactions,” Wolstein says.

If DDR does spot a tempting acquisition, it should have little trouble financing the deal, according to Robert Gadsden, portfolio manager of Alpine Realty Income & Growth, a mutual fund.

Thanks to its track record, the REIT has been able to rely on a variety of financing sources, including foreign investors and the bond markets. “Wolstein has become a big player in the markets,” says Gadsden “and lots of people have noticed.”
— Stan Luxenberg

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