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Real Estate Oversupply Still Looming Problem, says Wharton's Gyourko

What's the job outlook for this year's crop of MBAs in the battered real estate sector? And what lessons are MBA programs learning from the economic crisis? Here's the second part of BNET's interview with Joseph Gyourko, chairman of the real estate department at Wharton:

BNET: How do you think the number of jobs and the structure of the real estate industry will be affected?
Gyourko: That's a darn good question, and I don't really know the answer. It's sort of the same answer to the question: "How large should Goldman Sachs be going forward?" I think in the very near term, jobs on the debt side of the business will be few and far between because the CMBS [commercial mortgage backed securities] market just died and dried up--I think it will come back, but not for this year's students. If they really like the real estate market, graduates need to enter the field via the big asset managers. Remember: a lot of value has been destroyed, but no buildings have been. You still have to manage buildings, still have to finance them, still have to lease them and the like, so I think you need to think about getting jobs with people who own those assets. We're trying to encourage our students to have a change of attitude from just wanting to finance real estate to have a new approach: going into these asset owners and saying, "Look, I can help you work out your problems." So, there will still be a lot of jobs, but there won't be a lot of pure Wall Street jobs.

BNET: Do you think this melt down could have been worse?
Gyourko: It's hard to imagine a bigger collapse in housing than we've had--but by the way, I think we're still going to get another 10% decline in aggregate prices. Do I think it could have been worse? If the Fed, had not extended all types of liquidity, absolutely.
We built way, way, way too much housing. We have an excess supply of new housing above the number of new households forming. It may be a five or seven year supply--it's big--it a large, large number. Between 2002 and 2007, we increased the nation's housing stock by 8.6 million units. Over that same time period, the Census estimates that the number of households increased by 6.7 million. So we built 1.9 million excess housing units.

BNET: And what new actions might the new Obama administration take to help the sector dig out?
Gyourko: In terms of policy, I hope that everyone thinks like the doctors do with their Hippocratic oath which states, "first, do no harm." Remember, the whole essence of the problem is we have a housing surplus, so don't do anything like give out subsidies that's going to create more of it. Low interest rate subsidies are going to encourage builders to build. We want the over-supply to be worked off.

BNET: So, what new ideas are you working on now?
Gyourko: I have some work in progress that's trying to get at just how risky commercial real estate is and just what we might expect in terms of pricing--and unfortunately that work is not very optimistic. It suggests that a lot of the commercial real estate is overpriced and it's going to mean-revert down--very much like housing does. The demand drivers for housing are very much the same as those for commercial real estate. What happens on one market ends up getting reflected in the other with a lag. Real estate is a derived demand. I think there's a wrong impression that real estate could lead us out of this recession; I think that's almost certainly wrong. When households and corporations are doing well, they demand a lot of real estate. Whether it's residential stuff to live in or offices to do businesses in. So, don't look for real estate as a sign when we are going to come out of this.

Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate and Finance and the Chairman of the Real Estate Department at the University of Pennsylvania's Wharton School.

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