Reality Check

UCLA Anderson Professor Stuart Gabriel developed his real estate course for the pandemic era
UCLA Anderson Professor Stuart Gabriel

Stuart Gabriel is UCLA Anderson’s Arden Realty Chair and director of the Richard S. Ziman Center for Real Estate at UCLA. His spring 2020 course addresses the impact of the COVID-19 crisis on real estate and delves into uncharted territory. The coronavirus has affected every aspect of life in the United States and, pandemic or no pandemic, real estate does, too — whether it’s residential or commercial, office space or strip malls, privately owned or part of a real estate investment trust. As an economist, Gabriel typically introduces increasingly complex data sets as a foundation for lessons that tie real estate in all its forms to the economy at large. The pandemic, however, layered in an element of the unknown as the economy slid into a recession unique among recessions. Undaunted, Gabriel acknowledged the unknown and wove it into his broader themes.

Q: Let’s talk about your class. How did it come about?

It is absolutely unprecedented in the lives of virtually every person on this planet, this pandemic and massive shut-down of economies. As an economic event, it is not a recession that we slipped into because, for instance, there was some excess of lending to unqualified home buyers. This is a deliberate turning off of an economy.

This event is going to be worthy of every dimension of research and science, from epidemiology to economics to social psychology, for literally the next decade. We are clear upon that because economists have spent the last decade seeking to understand the global financial crisis. The pandemic provides both an opportunity and an imperative for learning; an imperative for teaching and an imperative to do what we are intended to do at a graduate school of management, and that is to help our students to understand the economic, financial and social environment in which they are intended to engage in business activity.

In the class, we seek to collect information on the pandemic’s immediate effects on a whole variety of real estate markets, be they housing or multifamily rental, owner-occupied or some other extremely troubled sectors of real estate

Q: Broadly speaking, what has the economic impact of the pandemic been on the real estate sector?

We have seen major entities in the hotel and retail sectors fundamentally imperiled. We anticipate very significant repurposing of real estate in the wake of this whole crisis but the crisis, by definition of the stay-at-home order, had immediate and profound real estate implications for any business that requires space to operate — whether trade, hospitality, retail, even the medical sector because of the significantly suppressed demand for elective medical activity.

We are also looking at the real estate capital markets where, like other portions of the capital markets, there was immediate extremely adverse reaction. Capital markets were imperiled to the point where it was only immediate and massive Federal Reserve intervention that allowed some of these capital markets to continue to function. Even as we get further from that immediacy, the capital markets, we see, are beginning to return, in many cases, to something that approximates normalcy.

Of course, it is a terribly perilous time for our students. The unemployment rate in the United States could rise to 1 in 4 before we are done. My course is just part of a much broader school effort to assure that business isn’t usual around UCLA Anderson. Rather, we assure that we are on it. We are there. We are current. We are responsive. We are interpretive. We are everything that we are intended to be as an entity that has the capacity and expertise to interpret the environment around us.

Q: How are you incorporating the headlines not necessarily associated with hard data that can be modeled?

There are so many things we honestly don’t know.

Part of the intellectual exercise of the classroom is to take what I would call structural change that could be forthcoming in the wake of the pandemic, in addition to any cyclical downturn where the structural change could be, for example, a whole new way of doing shopping in the future.

Perhaps we have just accelerated, massively, the demise of retail space or perhaps we have accelerated, in a way that no one could have ever planned, remote workplaces. We might need more office space because people aren’t going to be crowding around a table in a high-density environment the way we work, and instead will need individual offices again with the ability to close a door, or at least some ability to social-distance for purposes of public health. Again, the uncertainty is massive, but we bring it in. We examine it and we acknowledge it.

Q: There really isn’t any aspect of our economy, of our lives, that doesn’t in some way involve real estate, is there?

One reason that I enjoy the work I do, is that it not only covers many important dimensions of what we call the real economy, it also is very deeply nested and articulated in financial markets and the capital markets. It also has a lot to do with public policy. You can’t talk about the Mall of America or the need for shelter among homeless populations without also talking about the real estate space.

Since this is a short course, I’ve had to make some choices. One of the choices that I made was to review federal, counter-cyclical pandemic policy. Let’s think about what is precedented, what is unprecedented. What are the complexities of the relationship between the Fed and the Treasury, the Fed and the White House? I like to create that grounding first; from there, it’s very important for students to understand some of the mechanisms and instruments of the capital markets. So we go into some fairly sophisticated topics that relate to securitization of debt, a whole bunch of alphabet soup of capital markets activity. But we can’t go too deep or too technical because there simply isn’t time in a course like this. There are limitations.

As you have detected, this is a bit like many of the other real estate courses we teach at Anderson, because it is not project-based. We are not talking about a pro forma for an individual property, or a development plan for a new apartment building at the corner of 1st and Main, or whatever. We teach all of that, but that is not what we are teaching in this class. We are teaching what I would call macro real estate finance, the mechanisms of finance, the plumbing of the system, the sector as a whole.

Q: What do you hope students will learn from the course about preparing for a black swan, managing the unexpected?

We have students that are tremendously talented, skillful and well-versed in a variety of areas of expertise. If I were to give students a very small piece of advice as they embark on a business career or entrepreneurial career, my advice would be to read the Wall Street Journal every day. Not so much the editorial page but read the section of the paper that relates to the capital markets. Read the section of the paper that relates to macro-economic activity. Be informed, on an ongoing basis, as to the status of the economy, of economic policy and of the capital markets that, contextually, are so important to your particular adventure.

My sense is, those who are constantly educating and reeducating themselves with respect to this environment — understanding the policy response, the direction of policy, the direction of interest rates, the direction of economic activity, what is changing structurally, cyclically, whatever — are the ones who are going to be better prepared to do astute business planning, and may have better outcomes.

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