Three leading experts, Ira Waldman, Susan Talley and Gary Best, discuss current trends in the rejuvenated global real estate market.
Ira Waldman: It is always important for law firms to be flexible enough to respond to clients’ needs and desires as domestic and global economies ebb and flow, as they are wont to do over time. Since Cox Castle has historically had its primary focus on serving the real estate industry and our practice groups are very well diversified, yet real estate-centric, we are able to anticipate and adapt to marketplace changes. Therefore, we can put a team of lawyers together, on any particular matter, that will have in-depth experience within the various specific practice areas relevant to the matter. If I happen to be working on a complex financing transaction that involves environmental, land use and tax issues, I can draw on the diversity of the practice areas in the firm in order to best serve the client. And that may be true in either surging or falling markets.
Susan Talley: Having practised as long as I have, in a market in which the oil and gas industry is a key sector, I know all too well the cyclical nature of economies in general and the real estate industry in particular. I agree with Ira that it is very important not to have too limited a practice and to emphasise a team approach in handling transactions. At any moment in time, I may find myself working on a hospitality project in urban New Orleans and a chemical facility in southwest Louisiana. In addition to partnering with our environmental, land use and tax experts, our real estate practice group maintains a close working relationship with the lawyers in our litigation section. We are finding that, with an ageing population, many high-dollar estate and fiduciary disputes involve significant real estate and real estate-related assets. Furthermore, even in the best of economies, projects become troubled. Whenever we are dealing with a loan that is in default, or on the verge of default, we bring together a team with real estate, financing, bankruptcy and foreclosure expertise.
Gary Best: The priorities of clients constantly change with the dynamics of the market; however, risk management has always been a key focus. For example, diversification is a significant risk mitigant for many Australian REITs that have invested across a strategic asset mix of retail, residential, commercial, industrial and retirement living. In Australia, over the past two to three years, residential investment has been strong and contributed significantly to strong financial returns while some other sectors have been soft.
Law firms are acutely aware of the requirements of clients for risk management and have supported clients as they have diversified their investments across differing sectors.
Ira Waldman: Mercifully, history has been a guide and most forward-thinking law firms did not repeat the mistakes of the 2008 recession, where real estate lawyers were let go due to the lack of work so when the economy eventually recovered there truly was little depth to service demand. This time many firms better anticipated that there would be a recovery and that the need for real estate transaction lawyers would return. So workloads – generally workout-related matters – were spread out among the transaction lawyers, who were then ready for the recovery. It was a matter of better resource management. And, given the timetable for project entitlements, many clients also managed to keep land use lawyers engaged, in anticipation of the recovery.
Susan Talley: We took the same approach as Cox Castle. We did not engage in any layoffs, and our real estate and transactional lawyers were deployed to assist with distressed loans and other similar litigation and bankruptcy matters. Having taken the same approach in previous downturns, we felt that was the best way to face the challenges of the financial crisis. We were also the beneficiaries of being in a somewhat countercyclical microeconomy. As a medium-sized firm in a medium-sized market, I will confess that there were some anxious moments. In the end, our decisions turned out for the best. We have an experienced and sizeable real estate team to respond to clients’ needs.
Gary Best: The major legal firms in Australia have expertise and capabilities to service clients participating in the real estate market.
While the amount of work has been subdued during and following the global financial crisis, most firms have maintained their commitment to the real estate sector and both are well placed to meet the current market demand and the expected uptick in the future work.
Ira Waldman: It seems like not a day goes by without reading in the newspaper about some real estate acquisition or planned development that involves a Chinese investor or a Chinese-related investment company. US real estate assets are considered a “safe” place to place money. And Los Angeles and San Francisco are considered among the safest of markets for commercial and residential real estate investment. Clearly the Chinese are a major factor in the residential market, often outbidding locals with all-cash offers and driving up prices significantly. While that is a problem for middle-class families, wondering how their children will ever be able to afford to buy a house, it is a boon for US homebuilders who are developing residential communities with the expectation of foreign national buyers, and are also now partnering with Chinese companies in the development of such communities.
Susan Talley: Being on what is sometimes referred to as the “third coast”, the Gulf Coast of the United States, my experience is a bit different from Ira’s. We are not so much seeing passive foreign investment in residential or other real estate projects. Rather, all along the Gulf Coast, there is considerable development of energy and petrochemical projects, often by foreign companies, and all of which involve significant real estate components. Moreover, because these projects tend to run into the US$ billions, the financing participants tend to stretch around the globe. Economists and other experts predict that not all projects on the drawing board will come to fruition; however, there will be a significant volume of industrial projects along the Gulf Coast in the years to come.
Gary Best: International investors (in particular China, who after spending $12.4 billion last year, is by far the biggest foreign purchaser of Australian real estate) have continued to have a fundamental impact on the market.
The foreign appetite for Australian residential real estate has centred on new dwellings, with total spend on off-the-plan apartments leaping from $5.73 billion in 2012–2013 to $16.4 billion in 2013–2014. We are now seeing the Australian Foreign Investment Review Board increase its supervision of acquisition of some classes of real estate by foreign persons and strengthen the enforcement of penalties.
Australia is ranked the seventh largest global commercial property destination. While foreign investors will sometimes actively lead the development of new projects (particularly in the residential sector), they will more often acquire long-term ownership rights as equity contributors. These financial contributions support construction activity and have led to a reduction in yields and a corresponding increase in capital values.
Ira Waldman: Other than a consideration of issues related to different real property types and reuse of existing buildings, I do not believe that there will be major implications for a real estate practice. While it is true that users of physical office space demand more efficient space planning and many workers work remotely, office space demand continues apace. Amazon and other online marketers were thought to spell the death of shopping centres; yet people remain tactile and want to touch, feel and congregate, so shopping centres are being repackaged in terms of space and tenants, but generally remain viable. And the Amazons of the world require major distribution facilities from which to dispatch goods. The technology boom has resulted in a re-imagining of the workplace, but certainly not its elimination. Yet in all of these situations the same tools that real estate lawyers have historically employed remain usable and adaptable to the developing environment. Our goal as a firm is to stay on top of market developments, retain close relationships with clients and remain the real estate focused firm that we have historically been.
Susan Talley: For some time now, changing demographics have forced more development and reuse in the urban corridor. I can look out of my office window and see any number of historic rehabilitation and mixed-use projects, with a significant residential component. That never would have happened even ten years ago. Although these are different kinds of projects, and typically involve complex ownership and financing structures, they implicate the same basic principles that real estate lawyers have employed for years. Even though the basics remain the same, technology has dramatically changed, and will continue to change, the ways in which we manage transactions for clients. We, too, value the importance of keeping up with current developments and adapting to changing technologies in managing our practices.
Gary Best: Real estate is increasingly seen as an asset class that has the potential, through urban renewal projects, to improve the competitiveness, productivity, liveability and economic viability of Australian cities. In most major cities in Australia, very significant urban renewal projects are under way which will breathe new life into underused and run-down sites, and will revitalise urban precincts within those cities. To illustrate, the project in Sydney known as “Barangaroo” is transforming a disused harbour front wharf area into one of the largest mixed-use developments with very significant public spaces that Australia has seen.
The current economic and social landscape, characterised by foreign investment, housing affordability issues and an increasing emphasis on sustainable building solutions, means legal advice on a broad range of issues are required by both public and private sector participants.
Major Australian legal practices are developing expertise and capacities in all of these disciplines in order to support clients who participate in these diverse and challenging projects.