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Since the crippling of the US property market following the financial downturn, the business of real estate has changed fundamentally. The days of loose credit conditions and even looser mortgage requirements are a distant memory that has been replaced by caution and cuts.
The sector has struggled against the backdrop of a sluggish economic recovery, plagued by structural problems in the labour market, the lack of new business formation, deleveraging by large private sector entities and the deceleration in private consumption that has put a halt to the construction, development and financing of real estate projects. Only now are there signs of a nascent recovery.
To survive through the uncertainty, property sector players have had to change the way they operate and in turn educators, including business schools that host real estate MBAs and electives, have had to evolve their curriculums to better prepare their students for the new risk-averse environment.
Required courses on real estate law, development and finance at graduate institutions such as the Wharton school at the University of Pennsylvania that teach real estate MBAs, have had to be taught in the context of this new environment.
“The courses don’t change but the content does. If I taught the same lectures as I did seven years ago, students would think I was crazy,” says Joseph Gyourko, professor of real estate and director of the Zell/Lurie Real Estate Center at Wharton.
“For example, in 2007 there was almost a quarter of a trillion dollars in commercial mortgage-backed securities issuance and last year there was almost zero. The world has changed and students have become aware the world has changed.”
Wharton also puts emphasis on related subjects including real estate economics, urban fiscal policy, the relationship between government policy and private development, international real estate markets as well as the aesthetic and technical considerations of architecture.
Matthew Spiegel, professor of finance at Yale School of Management who teaches real estate classes, echoes this statement.
“To some degree you don’t have a choice but to change. At one time the derivatives market didn’t exist, the subprime market didn’t exist, now they do. You can’t have courses where huge sections of the financial community are ignored. You can’t skip them,” says Prof Spiegel. “There were huge real estate institutions that fell apart. Our job is to now ask how do they recover and what does the new version look like.”
Since the downturn he adds, more emphasis has been put on risk analysis and its effects, noting that the financial crisis had its roots in the market for residential real estate.
“Before the real estate crisis, it was thought that you could diversify and eliminate risk through spreading it out. This fell apart. Now we’re asking, ‘Why did things fall apart?’ There is a lot more discussion along these lines when there didn’t used to be,” says Prof Spiegel.
Other institutions such as the Haas School of Business and Kellogg School of Management offer real estate programmes as part of their broader MBA offering, acknowledging the need for tomorrow’s professionals to have a thorough understanding of the theory and practice of the real estate industry.
Lynne Sagalyn, director of Columbia’s MBA real estate programme, says that to keep courses as fresh as possible the business school has developed 65 case studies, including 10 in 2009 alone, that form a key component of the school’s instruction.
Schools on the east coast have benefited because they are able to leverage the richness of New York City’s real estate industry and Wall Street as a laboratory for learning. Experienced industry professionals serve as adjunct professors at Columbia and devise curriculum material while others act as guest lecturers. “We are constantly innovating to stay fresh. We want the educational perspective to reflect the evolution of changes,” says Prof Sagalyn.
The evolution of the US property environment and the subsequent changes to real estate programmes at these schools have resulted in a shift in the make-up of the students on these courses. While many sought to go into development during the property boom, the numbers have dwindled as construction is at depressed levels compared with its record highs. Speculative development, while showing some signs of recovery, remains very low because many developers struggle to get credit from banks.
Aaron Blatt, a second-year MBA candidate at Wharton, is one of the few among his peers who still wants to work on the development side of the business.
“Most people who want to do the real estate MBA want to go into the investment and financing side of the business ... I have a lot of family in real estate so going into development was a natural step for me,” he says.
“Those candidates who want to work on the investment side will benefit from the big recruiters that come to the school like the real estate divisions of banks and private equity groups,” he adds.
The US government and Federal Reserve have encouraged private sector participation to spur the country’s housing market recovery through clearing the glut of foreclosed homes. These homes at depressed prices have generated considerable interest from institutional investors – future employers of these students – and are emerging as an alternative asset class. In the past year alone, private equity investors have poured hundreds of millions of dollars into these properties, often with the intent to rent.
Adam Cohen, a real estate MBA candidate at Columbia, ran Darwin Capital Management, acquiring, renovating and renting single-family homes in the south Jersey market.
“There are opportunities out there for investment with funds springing up across the US,” he says.
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Business schools have tried to internationalise their real estate programmes in line with the broader trend in MBAs. “One of the biggest recent changes at Wharton has been the rise in the number of international courses in the real estate programme. The world is a small place. A third of our students are foreign nationals. While things were slow in the US, there was development elsewhere – from Puerto Rico to China,” says Prof Gyourko.
Aside from the increasing number of international students, US students are more aware of real estate environments beyond their borders.
“MBAs really are becoming more internationalised,” says Prof Spiegel. “Our students want to know what it means to invest in India, for example. They’re asking what are the advantages and disadvantages of holding real estate in a different country.”
A greater emphasis on the social impact of real estate development and finance is another growing trend, reflecting a broader shift in MBAs. Columbia’s latest offering will address topics such as socially responsible development, the challenges and opportunities of financing affordable and mixed-income housing and how shifts in public policy and priorities affect the availability of capital.
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