Real Estate Crisis Will Leave Scars for a Decade, says UCLA Prof

Eric Sussman teaches real estate at UCLA's Anderson School of Management, where he has been voted Teacher of the Year nine times by students. He is also the president of Amber Capital, a 15-person real estate investment firm. Though he's the first to admit that the current downturn is part of a larger cycle, he also believes that it will leave its mark on the real estate industry for years to come.

BNET: How has the real estate and financial industry crisis of last year changed the way you teach real estate?

Sussman: It hasn't changed the way I teach all that much. It gives me and the students a new perspective on the cyclicality of markets and how to account for risk and return on the price of risk. Every professor who cares about educational process is probably naïve enough to think that the lessons they are trying to impart actually sink in. I try to talk from the empirical perspective -- it's not some theoretical model. We're talking about real estate asset classes and returns and risks. From my perspective, the real estate crisis is a data point that proves some of our lessons.

BNET: Well, then, how do you think real estate professionals' approaches have changed?

Sussman: People's memories are short. I've been in real estate long enough to remember the 1989 and 1992 recessions. Of course, every real estate recession is unique, but a lot of these same things happened then as well. We had too much leverage and really poor underwriting by financial institutions that caused the Savings & Loans to go down...a lot of the deals were tax-driven [rather than value driven]. But the end result was too much money being thrown into crappy deals.

Then real estate did well in the nineties and we had the bubble period of '03 to '06 and the same thing happened again: excessive leverage, poor underwriting, and poor oversight.

For people like me, who are in the business today, this is going to leave some serious scars for probably about 10 years. Underwriting is going to be very tough, and there will be way less leverage. There will just be fewer deals. People's attitude toward risk will be changed for at least a decade.

BNET: Is industry reforming in the right way, and is government doing the right things to ensure that the markets are more stable?

Sussman: Do I think government intervention is a good thing? Is that what you're asking?

BNET: Take it as you will.

Sussman: Here's my perspective. Yes, I believe that regulation, and sometimes government intervention, is a necessary evil just to stabilize things. In hindsight, I think they did the right thing last year. You can argue they didn't do enough. We'll be talking for years about whether they should have saved Lehman. I'm not one of these unfettered-free-market guys.

But it's not sustainable. Take the first-time homebuyer tax credit. So far, the data have demonstrated that it's stabilized the market and had an impact, but it's not a sustainable strategy for the long term. The job market has to recover, and the economy has to support real estate prices -- not some government action.

BNET: Do this year's students have different goals when they come into your real estate class?

Sussman: That's a no-brainer. MBA jobs in real estate were plentiful between 2003 and 2006, but now they've completely evaporated. I remember when e-commerce and distribution were the hottest things in 1998 and '99 -- everyone was creating their business plans. Then those professional opportunities evaporated. Next Wall Street opportunities became more popular again, and now those have largely evaporated. This is all a part of the cyclicality of job opportunities for MBAs, though this episode may go a little deeper. The reality is that the only opportunity in real estate right now is in distressed funds.

We'll hear more of Professor Sussman's perspectives on the real estate market next week.