Sunday Wrap

Well, what about that lofty conference theme, “Rethink, Redesign, Rebuild”? The one-line answer: It stayed in Rethink, with brief examples of Redesign.

But even that is worthwhile, because after the economic crisis, getting opinions and challenges from different viewpoints on the table, and having them widely heard, is valuable in itself.

A year ago the conference mood was ‘Controlled fear and cautious optimism.’ I’ll confirm what I said on day one, that this year the mood is ‘Cautious optimism.’ But I would qualify that by saying that it relates to optimism that we will not slip back into recession, and that short term economic growth will be restored.

Two Areas of Concern

As the days passed, I got a clearer sense that there is still concern and remorse on two scores in Europe, Japan and the U.S.:

1. A sense that there could be a period of slow growth in those areas due to the twin effects of removing stimulus spending and then cutting government spending to reduce deficits. This combination will remove growth potential from economies.
2. A concern that the world financial system, in its present form, is capable of unwinding again and doing great damage. Which is why even the bankers agree that reform and better regulation is needed (nothing to do with bonuses, all about protection).

The implications for us? Well if (1) holds, we will see only a slow recovery in demand for space. The market will not ‘come to us,’ so we’ll need to continue to fight hard for market share gains if we want to put growth back into our own revenues. We’ve been very successful, so we have the formula.

You can be sure that regulation on (2) will happen, and that it will mean that banks and lenders are going to be unclear and uncertain about their future rules. Like any business, that will make them cautious. That caution has already been clear in their recent lending policies, which will continue, because whatever regulations emerge, it’s 90 percent certain that the regulators will force banks to hold more capital. That means they will mechanically have to shrink their loan books back to the level their depleted capital and higher imposed reserves will support.

For us, that means our capital markets clients will continue to need help with new debt and debt renewals. It also means that the pace of workout on non-performing loans will remain limited by the speed that banks can take the strain on their capital.

A ‘Western’ Event and Problem

It also became clear that, except for Japan, the whole of Asia Pacific now sees the Great Financial Crisis as a ‘western’ event and problem. From Australia to India to China, a brief period of illiquidity has been followed by rapid growth: 8 percent forecast for 2010, and Asian banks and national finances are all in great shape. Some quotes from Asian panelists, said without arrogance or malice: 

• “This will be a LUV shaped recovery: L in Europe, U in the US, and V in Asia.”
•  “I’m really pleased that banks get more regulated; it brings the rules up to Indian standards.” (Former Head of the Indian Central Bank) And a comment from me, it’s true, they are very strict.
•  “We realize in China we will have to switch structurally from export growth to domestic growth, because American demand is not coming back to past levels. It will take us time to do this.” (China Central Bank Deputy Governor)
• “China grew while the West shrank, so after two years, China’s GDP now equals Japan’s, it exports more than Germany, and has the world’s largest car market. (IMF Deputy MD)

The impact on us? Well, clearly we’ll continue to invest to grow our successful Jones Lang LaSalle Asia business, and we’ll back LaSalle Investment Management’s strong focus on investing in Asia Pacific. For the other regions, the implications above on the economy and banks still apply.

As always, it’s very instructive to see a situation from the other perspective.

More on the Banks

Further to what I wrote about the banks getting together, it’s clear that bank CEOs and Central Bankers were having ‘constructive’ (meaning furious) meetings behind locked doors this week. From that, they say that they broadly agree that regulation needs common international principles (I think that’s great, but it’ll be hard). I only hope they cover hedge funds, offshore banking, the securitized sector and any other areas capable of inflicting harm.

I’ve written enough about banks.

The Social Agenda

The economic discussions were also closely linked with the question of how unemployment created by the crisis can be quickly corrected, especially among the world’s youth. U.S. unemployment for 18-25 year olds is 22 percent, the EU has 25 percent, and Spain 43 percent.

I discussed property sustainability issues on previous evenings, and the subject ran through all business areas, with all sectors commenting that there has been no loss of focus through the recession. There was plenty of reference to the developed-developing country divide that sank the Copenhagen conference.

Meeting Attendees

No Russians this year. That economy is in difficulties.

A few Australians. I spoke a lot with Steve McCann from Lend Lease, and briefly again this year with Gail Kelly from Westpac.

There was a moderate Japanese presence, but few Chinese companies, although Ms Zhang Xin from Soho Reit, a good firm client, was there with our Real Estate group. The Chinese panel experts were very impressive.

There were lots of Indian companies, including Godrej, Raheja and Religare among our clients, and others that we are developing. Dubai property companies stayed away, but the Middle East was otherwise well represented.

There were more U.S. companies than last year, and many American academic experts. The U.S. economists, in particular, are well respected, because they had been predicting disaster for several years. But the real difference was that the U.S. government, absent in 2009, reappeared, with a dozen Senators and Congressmen, and Larry Summers from the White House. There was also John Negroponte, diplomat, and recent U.S. Ambassador to the United Nations (and a good one), whom I have known since my son, Pierre, and his son, George, played on the same soccer team, and who is sitting next to me on the plane back home to DC. 

But Western Europeans feel like the largest group, just, present in good numbers from all countries.

Jones Lang LaSalle got some good profiling with clients and potential clients, and for that alone I found it very worthwhile. I can also think of other clients who would enjoy going, and get benefit for their business.

We have follow-up work to do, including client business, a presentation on real estate markets for the board of a European Bank, thought leadership projects with the Financial Times (brokered by our board member DeAnne Julius), and new business leads.

The week was carefully prepared by Beth Brown, Gayle Kantro, Tim Lynch, Joanne Bestall, Charles Doyle and the regional heads of marketing, who hunted out the client information. Thanks to them, and all who contributed client and potential client information. And to Paul Nielander, who put our Client First (CRM) system experimentally onto an iPhone for me.

This ‘blog’ was also an experiment in ‘Connections.’

I summarised what I saw, and made it clear when I was giving you my opinion. It gave me a small insight into the life of a journalist, including the feeling I have today, that yesterday’s news is quickly stale!

Thanks for reading, and for the questions, and send suggestions for improvement.

Without internet access, I cannot answer your questions, so I’ll get those done early Monday.

Look out for our Q4 results on the wires Tuesday evening U.S. time!

–Colin

PS. If anyone (oldies like me) liked the original ‘Three Tenors’, check out the ‘Three Afro Tenors’, who rocked at the closing South Africa theme dinner. http://www.5sm.co.za/bands_afrotenors.htm

‘Double Dip’ Recession and Key Themes for Real Estate

Colin Dyer
Chief Executive Officer
Jones Lang LaSalle

It wasn’t so cold this morning, and I had breakfast at the hotel with the CEO of Dassault Systemes, a global tech systems company which has become a client since this event last year, with the potential to grow further. 

Met up later in the day with a Board member of Allianz, the German insurance company, who are clients in both capital markets and tenant rep across three continents. And with the CEO of Bloom Energy, a U.S. West Coast producer of innovative fuel cells which is moving out of the startup phase into commercial production. 

Dodging a ‘Double Dip’ Recession 

In the conference program, itself, I finally saw a lively broadcast session called ‘Dodging the Double Dip’, which turned out to be a series of spats between panel members and the audience. 

One panelist, U.S. congressman Barney Frank, argued that there will be a double dip unless the U.S. stops spending on defense. Pascal Lamy, Director-General of the World Trade Organization said there will be a double dip unless world trade is kept free. And the president of the International Trade Union argued that there will be a double dip unless governments rapidly create more jobs worldwide. An economist from SBC thought we were doing just fine. 

Everyone pushing their own agenda, and all pretty inconclusive… 

Key Industry Issues 

This afternoon I was on a panel with the CEOs of the Boston Consulting Group, Eton Park Capital Management and NBC Universal, and Josef Ackermann, Chairman of Deutsche Bank. Each explained the key issues facing his industry. The conversation constantly came back to the issue of regulating the financial industry and getting it back to work again. Our five industry themes link in with that. 

Our 5 Key Themes for Commercial Real Estate 

I said yesterday I’d come back to these themes, which the real estate community here believes will be important over the next 12 months. 

• The first is obviously the trajectory and speed of broad economic recovery worldwide, which will drive demand for space in retail, office, logistics and so on.  
• Second, when do national regulators settle on the regulatory approach they’ll apply to the financial system? It’s clear that this whole subject is causing a great deal of uncertainty for the banks. (More below.) 
• The next item is the reopening of securitization markets. Deutsche Bank Chairman Ackermann believes the security markets will (must) reopen, because there is demand among investors for the instruments, and because banks need securitization. They cannot carry the scale of lending needed on their balance sheets. But when mortgage-backed securities markets do reopen, he thinks they’ll be more transparent, simpler and much less risky than the paper assembled to 2007.  
• The fourth major theme is central bank policy on interest rates and the availability of liquidity. This obviously affects the availability of debt for real estate finance. 
• Fifth and finally, the area of sustainability is a big issue for the whole real estate sector. Corporates and governments are increasingly demanding efficient space. Owners are beginning to see that they need to make real estate energy efficient to keep its value over the long term. And there’s the added ‘zing’ of coming government regulations on building performance.  

So those are the big issues which the real estate group discussed yesterday, and which we then shared with the broader Davos audience this afternoon. 

Financial Institution Lending 

I also said I’d talk about banks and financial groups and their willingness to lend. 

Absent any other factors, the banks here seem keen to gradually get back to business as normal. They’re looking to increase lending to all sectors as world business improves, as their confidence in their customers’ credit-worthiness is restored, and as their own balance sheets are gradually repaired after losses in the recession. 

But they’ve plainly been spooked – and are genuinely upset – with the political response to public anger about bank performance. They themselves believe that the real problems are deep and need to be quite carefully worked through, and shouldn’t be handled on the back of a knee-jerk reaction. Paraphrasing Herr Ackermann, “The issues need to be looked at rationally. Do we have to match sound bite for sound bite?” I think they do if they want to fight poor regulation…

Bloomberg reported that the banks have been meeting together privately here. You can wonder for what purpose. 

Corporate Confidence 

Finally for today, a few thoughts on the overall level of corporate confidence, which obviously is important for our Corporate Solutions business and for our tenant rep and leasing work worldwide. 

Companies are regaining confidence. They have generally had satisfactory earnings, and most have solid cash/liquidity positions. They’re in a mood to move forward and grow their businesses again, but are still looking for evidence to proceed, given the experience of the last 24 months. And, of course, they’re not facing uncertainty from unpredictable new regulations, like the banks. 

So while there’s relief rather than enthusiasm in the Davos air, there is growing confidence that demand in most industries is gradually coming back. It’s good to have that confirmation of our own thinking about our plans for the year. 

It’s stopped snowing, and it’s slightly less cold tonight. This evening’s events include a reception with Citibank’s bosses, followed by a reception with Deutsche Bank’s top people, and then a dinner with Wipro, the Indian IT outsourcing company. 

One more day, and on the plane home on Sunday, I’ll summarize key themes for you.

Market regulation and market conditions

Colin Dyer
Chief Executive Officer
Jones Lang LaSalle

The headline-grabbing event from yesterday evening was French President Sarkozy’s speech on the state of the world. Sarkozy put forth his point of view on the need for regulation of the banking system, and that this should be done on a coordinated, global basis. 

That seems a good plan, but incredibly difficult to achieve in the light of individual governments—like the U.S. and UK—going out unilaterally and announcing their own plans. 

Sarkozy was also pleading for a less globalized version of capitalism, with more respect for national boundaries. But, he said with a smile, “I know I’m under suspicion because I’m French.”  I missed his speech, but got this colour from those who were there. 

Interviews on market conditions 

Moving on to today, it was another freezing early start, again to do TV interviews. It seems to be an obsession with the media here to stage their interviews in the open air. It’s cold and it’s snowing, but they seem to like it that way. The only benefit I felt is that at least it wakes you up. 

The first interview was with Reuters, which was a general discussion about the state of the markets. You know our firm’s view on that: 

• Recovery in the capital market transaction volumes has started in some cities, and is generally spreading from Asia westwards.
• Like the stock markets, these capital markets transactions are anticipating a recovery in the fundamental demand for real estate by 12 -18 months.
• There are signs of recovery in those fundamentals, starting in Asia again, and spreading west later this year. 

The second interview was with CNBC, a double interview with Ken Rogoff, Economics Professor at Harvard University. Again the topic was the state of the markets. Offline, Rogoff told me he thinks that, with the possible exception of China and Australia, interest rates will remain low for at least this year, with governments very nervous at adding cost to scarcity in the credit markets. 

Conditions in world real estate and capital markets 

At lunch, I chaired the rather grandly named Governors Meeting for Real Estate. The meeting was attended by 40 senior people from real estate around the world. Anyone who is interested can get the names from me. 

My job was to kick the meeting off and, in ten minutes, describe the state of world real estate and capital markets, suggest some likely prospects for the future, and frame several big picture issues which are going to affect the real estate world for the next 12+ months. I’ll tell you those tomorrow, when I do the same thing with a larger audience. 

The tenor of the meeting was positive and upbeat, mostly because things are getting better each quarter. But among European and U.S. property people, there is an awful lot of uncertainty on the impact on banks and on their confidence and willingness to lend…because of the next item.   

More debate on the pace and scope of regulation 

One of the major questions in the air this week, perhaps the biggest single issue at the meeting, is the pace and scope of the regulation that will be applied to the financial sector. As I said above, President Sarkozy put his point of view, but there is a lot of debate as to how draconian such regulations should be and, indeed, about how they should be framed. 

The banking system is only one part of the broader financial markets. There are a great number of unregulated instruments and markets over which the banking regulators currently have no control. So the question is, how do governments get to influence that area? And how do they stop what they call ‘regulation arbitrage’ between regulated and unregulated sectors of the market and between more regulated and less regulated countries? 

It’s an interesting debate, and it’s going to affect us in a big way. Credit is obviously the life blood of the real estate investment markets worldwide, and the extent to which credit is freely available affects transaction velocity in our markets. 

I’ll talk about my impressions of banks’ attitudes to lending tomorrow. 

My only planned one-on-one with a client today was with Martin Blessing, Chairman of Commerzbank. The two of us perched on a balcony ledge in the corner of a busy coffee area. Not your usual senior client meeting venue. 

Responding to you 

Thanks for the comments, advice and questions that have been prompted by these notes, both from colleagues and clients. (That surprised me!) The pace of events here makes it difficult to answer in real time, so I will do a summary Q&A postcard next week. 

My daughter just emailed that yesterday’s postcard is on Reuters. Another surprise.

The BBC, social agendas and social media, and retrofitting energy efficiency

Colin Dyer
Chief Executive Officer
Jones Lang LaSalle

Today, the first full day of the Davos conference, started for me at 6:30 this morning, when I left the small family ski hotel where I’m staying. Walking through town for an early interview with the BBC, I was challenged twice by the Swiss riot police, who are amazingly friendly and cheerful at all times, even when it’s -14° C (7° F), as it was this morning.

 Regulating financial institutions 

The BBC interview was a short, open-air affair held on a balcony. The questions focused on two issues of the moment: recovery in real estate markets internationally and how we feel about further regulation of financial institutions.   

Clearly this is being debated quite a bit, with President Obama in the U.S. and European governments making moves towards tighter regulation. 

Our point of view is that we need stability in our financial systems. Our clients, and our own investment management business, both need to be able to finance investments in real estate without the constant threat of either a boom or a bust because the finance is over-liquid and under-regulated. So overall, careful regulation should be good for the real estate industry and our clients.   

A ‘social agenda’ for business 

What’s also clear is that the ‘social agenda’ around business, and corporate social responsibility in particular, are on the minds of a lot of people. For real estate, this comes back heavily to the issue of carbon output, since we know that real estate produces nearly 40 percent of the world’s carbon, and to broader questions of sustainability. 

In that context, it was interesting to listen to Jack Ehnes, CEO of CalSTRS, the California State Teachers’ Retirement System. He described the organization’s commitment to sustainability as it makes investment allocations and picks investment managers. CalSTRS seeks investments in mainstream countries, with good returns, and, if they’re technology-based, in mainstream technologies. Increasingly, however, CalSTRS is also looking for the clear integration of sustainable investment principles from their managers and in their allocations. 

Growing interest in social media 

There is also talk amongst business people here about the impact of social media on their operations. Much of the interest stems from the fact that current  business leaders are simply not of a generation that is familiar with Twitter, Facebook or Linkedin. 

People do seem to understand the potential for social media to make organizations much more open and transparent, and to make the connections between organizations, their employees and their customers much more interactive. This should work in the favor of our firm, with our collaborative and ethical culture, but it remains a work in progress, with no big conclusions so far. 

In the retail sector, BestBuy, the U.S. consumer electronics retailer, is using social media internally – to have colleagues help each other solve technology problems – and externally, to get instant feedback from customers on the quality of their products and services. But no one here seems to have worked out really effective uses of social media in professional services. 

Even if it’s not clear yet what the applications and implications could be for us, what I hear here reinforces the direction our marketers are taking to investigate and invest in social media this year. Perhaps these comments will provoke someone to offer some new ideas, which I’d be glad to hear back on. 

Conversations  

Throughout the day, I’ve met with clients for one-on-one conversations. I talked with S.D. Shibulal, COO of Infosys Technologies, the large Indian outsourcing firm, who is interested in providing their technology services to us, but, more importantly, is open to a discussion about our managing their real estate outside of India. I also had a general catch-up yesterday with Steve McCann, the CEO of Lend Lease, an important client in Australia, and today, with Frits van Paasschen,  Starwood Hotels CEO. 

Retrofitting energy efficiency 

Finally, this evening’s job has been to chair the Governors Meeting for Real Estate, a dinner with 50 senior people from the real estate, hotel and financial sectors. Dinner was followed by presentations and discussions about the role of retrofitting energy efficiency into existing real estate. The presenters included: 

• Joachim Faber, CEO, Allianz Global Investors
• Rick Fedrizzi, CEO, U.S. Green Building Council
• Steve McCann, CEO, Lend Lease
• Kevin Surace, CEO, Serious Materials 

The big problem about energy management and carbon emissions from real estate is not so much building new properties effectively. The issue is retrofitting energy efficiency into existing stock, the vast majority of all commercial property, which will still be with us in 2050. 

Principal points made by the speakers: 

• There is quick financial payback from investing in classic technologies.
• Building costs are 20 percent of the life-cycle energy costs of real estate, and therefore there are big benefits in lowering the cost of that 80 percent tail.
• LEED has become a very effective international marketing tool for building efficiency.
• There are big business opportunities in improving building efficiency.
• The world has to develop and implement ‘green leases’ to allow the benefits and costs of retrofitting to be shared between owners and occupiers.  

The appetite for sustainability certainly hasn’t diminished during the past year. If  anything, it’s stronger, driven by the real cost savings potential. (And I hope that answers your question, Mike Mroz.) 

That’s all for tonight. I hope you’ll check back tomorrow.

First Postcard – and first impressions – from Davos

Colin Dyer
Chief Executive Officer
Jones Lang LaSalle

Hello from Davos, Switzerland, where I’ll be spending Tuesday through Sunday at the World Economic Forum, which is held here each year. This is my third visit, and the second with Jones Lang LaSalle.

The Forum brings together 2,500 business, government and public-sector leaders from around the world into one cramped convention centre and lots of crowded hotels, to discuss events, conditions and social issues impacting the global economy.

Why am I taking time to participate? It’s a very efficient way to meet with clients and prospective clients at a senior level. It reinforces the firm’s visibility to senior clients. And we are the only major real estate services firm here, so we’re able to lead on issues – such as global real estate market conditions, real estate finance and sustainability in buildings – to a global audience of business and public leaders.

And in between, there’s the opportunity to get some feel for the big questions of the moment: 

• If we’re through the recession, what comes next?
• How will governments regulate the financial system?
• How will governments fix their own finances?
• Implications of the big power shift from west to east? 

I’ll try to draw some implications for real estate, the firm and our clients. We’ll see what indications we get by Sunday. 

Here are some first impressions, from the bus, the book line, the attendee list and the first evening’s events: 

• The U.S. government, absent in 2009, seems to be back this year.
• The same story goes for the banks, who mostly stayed away in ‘09 (expense control and concern at being scolded!), but are back in good numbers. 
• And there are clearly more Indian and Chinese companies attending. 

The general mood of attendees last year was somewhere between “controlled fear and cautious pessimism.” So far this time, the mood feels “cautiously optimistic.” 

The Forum’s theme has changed, too, from 2009’s unofficial “What went wrong, who did it and how do we survive?” to 2010’s official focus on “rethink, redesign and rebuild.” 

I’ll be adding thoughts to this blog at the end of each day’s session this week, and I’d welcome any comments you have.