Q&A: An Under-the-Radar Look Beyond Late-Cycle Plays

DLA Piper’s John Sullivan ties together key points from the law firm’s 15th Global Real Estate Summit in Chicago.
John Sullivan, co-chair of global real estate practice & chair of U.S. real estate practice, DLA Piper. Image courtesy of Michelle Weeks

At the close of DLA Piper’s 2019 Global Real Estate Summit, Commercial Property Executive had the opportunity to sit down and chat with John Sullivan, co-chair of the firm’s global real estate practice & chair of its U.S. real estate practice.

Sullivan’s work encompasses all aspects of commercial real estate, with emphasis on representing public and private pension plans, opportunity funds, investment advisors and non-U.S. investors in equity, debt, hybrid and joint venture transactions throughout North America.


See our full coverage of the 2019 DLA Piper Global Summit


The conversation covered what might be under the radar, noteworthy secondary asset classes, and if it even matters whether CRE causes the next recession.

Is anything running under the radar right now? Is there anything the CRE industry should be paying more attention to?

Sullivan: There’s a tendency—at least in the real estate industry, it might be true in all industries—to get a little myopic. You look at sort of your own world. You look at the fundamentals of the real estate market now, and they’re generally pretty good across the country, in most markets and for most asset types.

You look at leverage levels, they’re pretty low. Even the leverage that’s there, the underwriting that’s gone into that leverage has been pretty conservative as compared to before the recession. So in general, you can look at the real estate industry and say it looks pretty solid.

In our report that came out last week, somebody made kind of a quip. They said, “Well, real estate in the past has caused some recessions. But we’re in good shape, so if there’s a recession, at least it’s not going to be our fault this time.”

Which is sort of funny in a way. But I think that what we maybe are missing with that mentality is that if there is a recession, it’s not going to matter what caused it! And the fact that we didn’t cause it isn’t really going to matter. Because, for example, if you have a recession, you are going to expect consumer spending to decrease. Consumer spending is 70 percent of the economy, right? So that’s going to have a significant impact on commercial real estate.

So it’s not necessarily something that’s under the radar, it’s more kind of hovering above and around the market.

Are there things the CRE industry could be doing, or doing better, right now, to prepare for the next recession?

Sullivan: What people need to do, and most are doing, is look closely at their balance sheet, because if there a recession is in the offing, you want your balance sheet to be in order, you want your debt levels to be manageable.

Which asset types are most vulnerable right now?

Sullivan: Assets that are more highly leveraged, have more debt, are going to be more at risk. Assets that have significant ongoing capital needs are going to be more at risk. So hotels, they’re very expensive assets to run. Some office, it depends on how much leasing you have to do. When you have a lot of leasing to do in office buildings, it’s very expensive to build out that space. If your property lacks functionality, you’re more at risk.

Some real estate asset classes are directly impacted by consumer spending, like retail. People have less money in their pockets, they buy less and they take vacations less, stay at hotels less.

On the flip side, what may be less vulnerable? Multifamily, because housing is a basic human need. Everybody has to have a roof over their heads. And if you look back at the last recession, multifamily held up better than most of the other asset classes. I think that would be true again.

And you heard a lot of talk today about logistics and warehousing, all being driven by the e-economy, this growing demand that all of us have as consumers for wanting to be able to buy anything we want with the click of a mouse, and then we want it tomorrow. So I think that asset class is likely to do OK through a recession, because there are so many macro forces behind that.


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I think the same thing is true of data centers. We have an insatiable appetite as people in the West for better and faster cloud-based services.

How are the secondary product types doing at the moment? There was at least one mention earlier today about overbuilding of student housing.

Sullivan: It seems to be true for some markets with student housing, but some of those newer asset classes … medical spending is roughly 20 percent of the U.S. economy, so medical space isn’t some little caboose at the end of a long train.

I think that’s true for life sciences as well, in certain markets. Boston is one of those markets, where you have a confluence of medical facilities and colleges and research facilities. That’s a very expensive business, it’s expensive real estate, but I do think that’s real estate that has a good future. 

There are cities that are going to try to duplicate that kind of environment. Philadelphia is trying to do that. Dallas would like to do that.

Going back to what you said about myopia, and given that this conference has focused in various ways on disruption, how would you summarize what this day represents?

Sullivan: Today has been about the future of real estate and innovation and change. Real estate, which has historically been an industry that has been slow to adapt, is finally coming around. We’re looking to the future and ways that we need to use technology and innovation to be smarter about real estate.

We need to reimagine how we think about real estate and think about it more from an experiential and people perspective and build for that, as opposed to just building buildings.