In 2007, I was most honored and pleased to be admitted to Class Six of the Advanced Management Development Program (AMDP) at the Harvard University Graduate School of Design. The AMDP is a year - plus long Executive Education program for practitioners of commercial real estate that have practiced for at least fifteen (15) years. The program commences with a two - week session in July, then a one - week session in February, focusing on a group project, and then another two - week session the next July, plus then completing an elective course and presenting an individual commercial real estate project. Upon completion, graduates are granted full alumni status to the Graduate School of Design (GSD). The GSD is where Harvard houses most of its real estate programs, recognizing the pivotal importance of design in commercial real estate.
The AMDP is, as I say, the most fun a grown up can have in school. In my class were eighteen (18) students, seventeen (17) gentlemen and one (1) dear lady. The class members had either lived or worked, or still lived and worked, in nine (9) countries. There were several of us from the United States, including three (3) from the south.
The program is just outstanding. There are no slackers in this arena and the instruction and dialogue are top - shelf. The professors are from the GSD, Harvard Business School, Harvard Law School, MIT, and then practitioners of the highest success from around the world. The experience is truly heady, and participation really changes the level of your interaction with commercial real estate and your view of the world. As I said, I am honored to be a graduate and I continue to enjoy the experience.
Each summer all graduates from the twelve (12) classes thus far are invited back to campus for a two - day reunion and interaction with the current classes. The July session gives some overlap of the current class and the next class and there are joint sessions with both classes. This fine combination gives the opportunity to expand your interaction beyond just your own class. The reunion consists of classes on Thursday, a fine dinner at the Harvard Faculty Club on Thursday night, and then classes on Friday. I just attended the 2013 reunion and, as usual, I am peaked with new perspectives about how the world works.
The faculty for AMDP is truly world - class, and the professors really like to teach or interact with we AMDP students. Generally the professors interact with undergraduate and graduate students, who are not uninteresting at all, but they truly relish interacting with and teaching seasoned practitioners from all over the world. We students questioned the claim that the professors like our classes so much until we understood that indeed they are sincere. We have excellent interaction.
A regular lecturer in the AMDP is a seasoned and renowned economist and analyst, and awfully wonderful fellow too. Ray Torto formed Torto Wheaton, a commercial real estate analysis and consulting firm, and it was later merged into CBRE, where Ray is now the Chief Global Economist. I have enjoyed a nice and regular relationship with Ray for the last seven years and I respect him immensely. If Ray says it, you need to listen. Ray spoke to this year's reunion, and with his words the ground shook.
Ray's presentation involved a global overview of commercial real estate, how we should think about the industry now, and what influences are important. Yes, we talked about the impact of rising interest rates on capitalization rates and property values, and we talked about the several global economies and how population growth drives gross domestic product growth and commercial real estate opportunity and need.
We also discussed the product that the commercial real estate industry offers the economy, which is of course buildings for the production of income. Ray suggested that the commercial real estate business is essentially "the economy in a box." We manufacture products in industrial buildings, we store the products in warehouses, we sell the products in retail stores, and we count the money in offices. Thus, as goes the commercial real estate business, so goes the economy.
We also discussed how some of the concepts of those buildings are changing. We all know the ancient adage of real estate, "location, location, location." We have always interpreted this adage to relate to the drivers and conditions of that location and the impact on value and desirability of certain real estate. Ray today, though, changed the analysis, and in so doing shook the ground.
All of us are aware of the new way of doing business. Largely influenced by technology, business is different. Offices are smaller, are less important, and have different design parameters. How we shop has changed with the Internet. Delivery times have influenced storage and transportation issues in commercial real estate.
We also have different ideas as employees and workers. The new generations of workers have different attitudes about work, personal time, money, transportation, and interaction. We see the individual office fade in desirability to the collaborative space. We see the corporate office park fade in desirability to the more connected urban scene with extra - work opportunities for engagement. We see younger workers opting for less pay and more time, seeking greener and more fun and connected, more social environments. Downtown and urban settings, recently passé' and moribund, are now the hip and cool places to work. Edgy, sketchy, rough places are more desirable than sterile "Class A" work environments. Workers want the hip, the cool, the engaged.
Employers are hearing this message. Recruiting to staid and "corporate" environments and communities is harder these days. Companies that are hip and cool, that have active after - hours scenes, that have walking and playing opportunities, that have more engaging physical environments, are where these young workers want to be.
Ray explained this in a work context that employers now are recognizing that they seek productivity, and that productivity is influenced, of course, by productive employees that demand interesting environments. With statistical data, Ray demonstrated that the intersection of Congress Street and State Avenue in the central business district (CBD) of Boston, the Class A and finest office environment and historically most successful sub - market, is suffering. The new competition in Boston is the Innovation District, or Seaport, a formerly downtrodden and challenged environment. The data show that the Innovation District enjoys a substantially higher occupancy of spaces than does the historically premiere CBD. This is a notable change.
Location, location, location may be the adage, but the definition and desirability of the location is now driven by the employees. Employers know that they must locate where they can attract employees and where they can expect the greatest productivity. This environment may no longer be the CBD, or it may be, but it may not be the area that has been the historically been the "best area" or location. The area for the best productivity is no longer determined by the bosses, but now it is determined by the employees. This is a sea change.
Ray offered a related closing point that is worthy of understanding and adoption. He indicated that the greatest risk to existing commercial real estate is obsolescence. Consider the classic "Class A" office space with a multitude of smaller offices around the perimeter and support space in the center of the building. Is this building still relevant for many office users? Users want more collaborative, interesting spaces, close to other unrelated support uses like restaurants and coffee shops and parks. What would appear to be a fine and serviceable office property could be a white elephant, with few suitors.
Obsolescence of office buildings is a serious issue for the commercial real estate industry. Think too about how online shopping is changing retail space needs. Think as well about how the increasing attractiveness of renting interesting, generally smaller, residential spaces is changing the apartment business. Think about how technology and time demands are changing how warehouses and their locations are viewed.
Think about your computer, your mobile telephone, and your camera. Remember how in times past you would buy a good one and keep it for years? Now, with technology and demand changes, you may keep these gadgets for just a year. Such is it with commercial real estate as well. The big issue is, though, that replacing a telephone is a nominal expense, whereas replacing a large office building is a substantial expense. Obsolescence and the new demand drivers in our economy are serious issues for commercial real estate.
So, I, as usual, loved my time at Harvard, and I return enriched and stimulated. I visited with great friends and I return with greater insight and understanding into this commercial real estate business that consumes my nights and days. I continue forward with a greater understanding of the drivers influencing commercial real estate and how this will affect my business and decisions. I am grateful for the insights and the opportunity.
