By Christopher M. Wright

Name: Stan Ross Title: Chairman of the board of the Lusk Center for Real Estate at the University of Southern California Born: 1936 Experience: Before moving to the Lusk Center in 1999, Ross retired as vice chairman of real estate industry services at Ernst & Young LLP, where he was also managing partner of Ernst & Young’s Kenneth Leventhal Real Estate Group. He serves on several boards of directors, including the Irvine Company, Forest City Enterprises (NYSE: FCY) and the University of Judaism. Ross has served on the President’s Council on Quality Control and the auditing standards board of the American Institute of Certified Public Accountants (AICPA).

Prescient is the word that best describes renowned real estate expert Stan Ross. For example, he predicted increased capital flows into real estate from private equity and institutional investors. Now at the University of Southern California’s Lusk Center for Real Estate, Ross is right where he wants to be—delving into new areas and investable trends that are on the drawing board.

From the Lusk Center, Ross anticipates shifts in capital availability and deployment, forecasts property fundamentals, identifies nontraditional market opportunities, calls for improvements in financial reporting and puts up his own money to fund a minority training program aimed at revitalizing the inner cities.

Recently, Ross sat down with Portfolio to discuss his thoughts on advising institutional investors about demographic changes in the United States and the globalization of the real estate industry.

Portfolio: Years ago, you forecasted the rise of private equity investing in REITs as well as increased institutional involvement in real estate. Now, what do you foresee for the future of real estate investing?

Ross: I have a vision for a global REIT holding company. This will be incorporated as a REIT in one country, such as the United States, and will own or have a controlling interest in real estate in other countries with REIT legislation. Capital will flow through the holding company and be put to work wherever the best investment opportunities—asset classes, returns and liquidity—can be found.

Portfolio: What types of capital would this holding company incorporate?

Ross: It should use various combinations of debt and equity. We’ll see institutional capital from around the world, but we’ll also see an increased amount of capital from individual investors in these countries looking for yield. Additionally, private equity and hedge funds will be major investors helping to fund the creation of these holding companies.

A variety of intra-company capital transfers will take place. The holding company may amass capital on its own or draw from its various properties around the globe. It may then shift capital from one unit to another. Additionally, all the working parts will interact in various ways.

Portfolio: Is there anything standing in the way of this vision coming to pass?

Ross: It’s possible now because there is sound REIT legislation in many countries. However, more legislation to support the free movement and repatriation of capital across borders is still needed in some countries.

This vision needs further development, but it is inevitable. The complexities are a challenge, but the hurdles can be overcome. The strategy is not for the weak or the small; it will take a large REIT to tackle the problems.

Portfolio: You wrote an article in 1998 suggesting that companies use strategic planning to get ahead of changes in capital availability. Although capital is abundant right now, some REIT CEOs are worried that this will not always be the case. What should they do to plan for capital scarcity?

Ross: Capital is available now and every company should aggressively access their capital markets before they dry up. The right strategy is to gain capital when it’s available and inexpensive.

Portfolio: What about the idea that companies get punished for “stockpiling” capital?

Ross: The goal isn’t to stockpile capital. If the long-term assets I want aren’t available, I’d look at interim types of investments, such as increased activity on the development side. Then I’d back capital into an earlier point in the cycle, capturing opportunities upstream and picking up yield.

Portfolio: You’re a big supporter of nontraditional property types, such as senior housing. What do you have your eye on now?

Capital is available now and every company should aggressively access their capital markets before they dry up. The right strategy is to gain capital when it’s available and inexpensive.

Ross: Student housing and government property. The military is increasing its expenditures on housing. For example, the Veterans Administration is changing from big hospitals to smaller outpatient facilities, and property is being repositioned.

I learned from forming the Resolution Trust Corporation that the government should get excess property off its books and bring in experts as quickly as possible. However, that doesn’t mean giving property away. The government can participate in future cash flows on an ongoing basis in joint ventures with private companies.

Portfolio: Are there other sectors that are overlooked?

Ross: Any company that’s not spending a lot of time strategically planning around demographic trends will miss some markets. This country will have a major Hispanic population in the not-too-distant future.

The Asian population also is growing tremendously. Our population growth is driven in large part by the arrival of those groups and by the fact that they are having large families. There are significant opportunities in housing, retail and live/work developments.

Portfolio: The U.S. Census Bureau projects that Hispanics will be one-quarter of the U.S. population by 2050. Do you see any REITs pursuing demographic strategies now?

Ross: You won’t see hard numbers, but you’ll see ethnic implications in the retail and multifamily activities of some REITs. They have clearly performed a market analysis and are connecting their demographic research and their knowledge of micro-markets with their product line expertise.

However, REITs still have something to learn from other industries on this score. Homebuilders were ahead of REITs in hiring ethnic executives. The ones that did so got input from Hispanics and Asians about the products those communities prefer. Also, many mortgage bankers and retail companies have translated their material into Spanish.

If I were an institutional investor contemplating a major REIT investment in retail, I’d investigate whether the company has incorporated ethnic implications into its planning. If not, I’d look for alternatives.

Portfolio: Are these factors affecting your advice to institutional investors?

Ross: Yes, I’m studying REITs differently. I’m not looking just at a balance sheet, but taking a hard look at the product line, their long-term strategy and see whether it reflects some of the current trends we’ve discussed—globalization and ethnicity. It’s not about achieving social goals; it’s about achieving economic returns.