For our latest interview, we had the pleasure of speaking with Timothy Riddiough, who holds the James A. Graaskamp Chair and is a professor in the Department of Real Estate and Urban Land Economics at the Wisconsin School of Business.
Dr. Riddiough served as department chair of Real Estate and Urban Land Economics from 2018-2022, as well as the academic director of the Graaskamp Center for Real Estate from 2004-2009 and 2014-2017. He’s best known for his work on credit risk in mortgage lending; mortgage securitization; real options; real estate investment trust (REIT) investment and corporate finance; and land use regulation.
Notably, Riddiough is a past recipient of the American Real Estate and Urban Economics Association’s best dissertation and best paper awards, as well as a fellow at the Homer Hoyt Institute for Advanced Studies and the Real Estate Research Institute. He was also president of the American Real Estate and Urban Economics Association in 2012. Professor Riddiough earned his Ph.D. from the University of Wisconsin – Madison in 1991 and was a tenured professor at MIT prior to returning to Madison in 2001.
Read on for his insights.
Q. Tell us a little bit about your background and why you chose a career in teaching real estate.
When I was younger I participated in a number of plays. I found out that I liked to perform in front of people. Later on, I worked for several years prior to coming back to school to pursue a Ph.D. That experience was valuable for several reasons, including learning about the kinds of jobs and careers I was not interested in pursuing. In short, I did not enjoy working directly for other people in larger corporate structures. So, academia was a viable alternative in that teaching provided me an outlet for my desire to perform, along with the fact that I really didn’t have a boss in the conventional sense. It has been the great career choice for me.
Q. Considering the COVID-19 outbreak, what are your thoughts on the commercial real estate (CRE) market in the U.S. today in terms of trends and challenges?
First COVID-19 and now inflation — a double whammy, if you will, at least for certain property types. Older office properties are particularly vulnerable, of course. Work from home and changing preferences of younger workers have combined in many denser urban markets to create a slow-motion train wreck that is only just beginning to happen. Higher mortgage rates are also going to create some formidable obstacles for owners that hang on too long without trying to reposition their assets. The good news is that supply has remained in check overall and newer, greener buildings are doing relatively well.
Q. How have you seen the industry evolve in recent years? Where do you see it going in the future?
COVID-19 and inflation have dominated recent discussion. However, I think the most important — and perhaps underappreciated — evolution over the past 30+ years is the move from traditional, decentralized private capital markets into the public capital markets as a result of the Savings and loan (S&L) crisis. This led to the introduction of Commercial Mortgage-Backed Securities (CMBS) and the REIT investment vehicles. Since the Global Financial Crisis (GFC), we are seeing a move back into private capital. In its current form, I am not sure this is a good thing. The transparency that comes with public market capital has been very important in constraining supply booms and busts that used to occur every 10 or 15 years. The impact of climate change on CRE runs a close second after the change in capital flows. The future? As the late, great Leonard Cohen said, ‘Things will slide in all directions.’
Q. Are there any lessons from the past few years that you would impart as an absolute must for those looking to get into the real estate industry?
Expect the unexpected and be prepared to adopt quickly. The pace of change in the real estate industry is startlingly fast — much more so now than 30 years ago: 9/11, the Global Financial Crisis (GFC), COVID-19, climate change, technological change. Phew! Quite a slate of game-changers. The next generation of leaders will be dealing with a much broader set of issues than my generation had to deal with.
Q. What is your general assessment for the commercial real estate market in 2023?
It’s going to be an interesting year. There will be a real test of the private equity real estate (PERE) capital allocation platform as net-asset value (NAV)-based mark-to-markets finally bite. There will be a real test for aggressively leveraged property owners with maturing debt. I expect to hear interesting public conversations about private versus social value associated with environmental, social and governance (ESG) investing.
Q. Are there any other insights you’d like to add?
I remember back in the late 1990s when I was teaching at MIT. At that time, real estate was considered passé as just about everyone was fascinated with tech. There seemed to be a belief that, somehow, a virtual world would displace the physical world we actually lived in. The tech bubble collapsed in 2000-2001 and real estate was back in vogue (too much so, as it turned out).
Well, with COVID, we are finally seeing what the virtual world can do vis-à-vis work from home. It only took 20+ years and a pandemic to get there. Virtual currencies … maybe another 20+ years to figure that one out. In the meantime, real estate — along with gold — will remain the ultimate store of value in inflationary times, although not exactly as we previously thought. I used to think that land underneath office buildings in Manhattan was the ultimate hedge against inflation. Now, perhaps it’s the land underneath mansion lodges located in certain parts of Wyoming, Montana, and Colorado.