Savvy REIT Executive
Shares Some Secrets

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What makes John C. Goff tick? Dallas-based real estate types found out recently, thanks to Real Estate Media's RealShare Dallas conference. A frank and personal conversation took place then between the vice chairman and CEO of Dallas-based Crescent Real Estate Equities Co. and Real Estate Media editor in chief Michael G. Desiato. For the record, Crescent -- co-founded by Goff and Richard R. Rainwater in 1992 -- boasts more than $5 billion in assets. What's the secret behind the success of a man who parlayed an idea into one of the largest public REITs in the country? Is there great growth ahead for the REIT universe? And what's next for Mr. Goff?

Desiato: What's the key ingredient to your success?

Goff: When I look for talented people, I always look for people who have had failure in their lives, who have been humbled. They tend to be more realistic without being fearful. I look for that balance.

Desiato: What changes are taking place in your company now?

Goff: We're moving a $5-billion battleship. You can't turn it overnight. But there is significant change. We're becoming more of an investment-management business as opposed to a pure real-estate owner. There's a major tide rising, and pension funds are making a much bigger move into real estate since now they're scared of the stock and bond markets. They represent $8 trillion in assets that have only 2% allocated to real estate. So for every point they increase that allocation, that's another $80 billion in equity going into this market. That's profound. A company like ours can never compete against that capital. That game is over. So we're aligning ourselves more with the pension funds capital. It's a cheaper source of capital, and we'll put up 20% to as much as 40% of the money and they put up the balance.

Desiato: Tell us please about the fund you launched with JP Morgan -- Fleming Asset Management.

Goff: It was with JP Morgan Asset Management as well as GE Pension Trust. Both are partners in the joint venture. We've done about $1 billion in transactions in this format, and you'll see that ramp up in the coming year.

Desiato: Do you expect that REITs will suffer some sort of reversal of fortune?

Goff: REITs are at an all-time high, but frankly, Crescent isn't and I'm not satisfied at all with where Crescent's price is. But we're still in the midst of making some very strategic moves. In general, REITs tend to be very myopic. They will grow and continue to own more commercial real estate, no question. But the buying power and capacity of REITs compared with pension funds is overlooked. All pension funds have to do is say that they're going to dial up their exposure by 2%, and they just increased their exposure by the equivalent of what REITs own. So for us to think that we're going to be an effective buyer of assets over the next five or 10 years, well, it simply won't happen.

Desiato: It's been said that you lack real-estate experience. Yet you run one of the biggest REITs in the country. How do you respond to that critique?

Goff: Everyone has the right to his opinion, but there is experience in my background. Outside of Crescent, I worked for Century Development and got a lot of experience in the boom. Over the next 19 years, there are going to be more people outside of real estate getting in. We purposely will hire people with no real-estate experience. I think that's very valuable. This industry tends to be inbred, and it doesn't have a lot of new fresh talent.

Desiato: Will there be new skill sets required of the tomorrow's real-estate executive?

Goff: Much more sophisticated business and financial expertise is paramount even today. Keep in mind that we didn't have a CMBS business 12 years ago.

Desiato: What trends should we be looking for?

Goff: I think we're going to see Dallas, Denver, Austin and Houston gain the respect of institutional investors over the next five to seven years. This will come because people will realize that we're not overbuilding as we once did. Then, we're going to see real estate become even more sophisticated and institutionalized. It will no longer be wrongly thought of as a growth industry, but rather, it will be viewed as a safe haven and a great way to get current yield backed by hard assets. CMBS will continue to grow and dominate the lending side of the business.

In the next five to seven years, I think you'll also see such innovations as insurance on vacant office space. In every other industry you insure against commodity prices. So I believe hedges for office space are a real possibility. More institutions coming in want to see more normalized earnings without fluctuations. Ski resorts insure against snow. If they can do that we can figure out how to insure against office cycles.

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