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June 2002
2002 Pension Real Estate Association Institute
The Zell/Lurie Real Estate Center hosted the 2002 Pension Real Estate Association (PREA) Institute at The Wharton School, University of Pennsylvania, from June 10th through June 12th. The PREA Institute provides an opportunity for members of PREA to deepen their understanding of the academic aspects of managing portfolios of public and private real estate investments. These annual topical programs are always taught in an academic setting.
Day One
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John Koza, President of Koza & Co. |
First Session: "Pricing and Risk in Real Estate Markets"
John Koza, President of Koza & Co. and Institute Committee Chairman, welcomed the thirty-five participants to the 2002 PREA Institute. Professor Joseph Gyourko, Martin Bucksbaum Professor of Real Estate & Finance and Zell/Lurie Real Estate Center Director launched the academic forum with a session on "Pricing and Risk in Real Estate Equity Markets." He examined the principles of investment risk and return analysis. He then reviewed likely return expectations for real estate and real estate’s role in a well-diversified portfolio. The session closed with a look at key factors likely to influence future developments in public and private real estate equity markets.
Second Session: "Private Equity Markets"
The second session was devoted to "Private Equity Markets" and was intended to provide Institute attendees with the necessary background to evaluate their private equity investments in real estate. The instructor, Wharton Professor of Finance, Andrew Metrick, examined the historical record of investment returns in private equity and how these returns should be evaluated in view of the complex risks for such investing. He also considered how the marketplace has changed in light of the recent upheavals in the public markets.
Third Session: "Pricing and Risk in Real Estate Debt Markets"
The third session addressed "Pricing and Risk in Real Estate Debt Markets." Professor Gyourko began by examining data on recent developments in real estate debt markets. He noted that the true risk of the real estate debt market and CMBS investing in particular could not be fully comprehended without an understanding of the various incentive compatibility issues facing investors in and issuers of real estate debt. He closed the session with a discussion of the mezzanine debt market, focusing on its implication for better risk allocation across investors.
Closing Session: "Public and Private Real Estate Equity"
The closing session of the afternoon was a "Public and Private Real Estate Equity" panel. Wharton Real Estate Professor Christopher Mayer moderated the panel that considered how the development of a public real estate equity market affected the opportunities for investment and wealth creation in the real estate industry. The panel of distinguished real estate industry experts included: Peter Linneman, Sussman Professor of Real Estate, Finance, and Public Policy and Management at The Wharton School; David Marshall, Chairman and CEO, Amerimar Realty Company; David Rubenstein, President, The Rubenstein Company, LP; and, Jonathan Weller, President & COO, Pennsylvania Real Estate Investment Trust. The panelists discussed the opportunities on the private side of real estate and how they differ from the 1990s and offered their own views on the recent slowdown in the growth of public markets.
Reception and Dinner
The day ended with a Reception and Dinner at the University of Pennsylvania’s Museum of Archeology and Anthropology. Institute participants dined, surrounded by the magnificent Sphinx and the Palace of the Pharaoh Merenptah, in the Lower Egyptian Gallery and took the opportunity to review the day’s sessions with their colleagues and presenters.
Day Two
First Panel Session: "Real Estate Cycles: Theory and Evidence"
The second day of study began with a look at "Real Estate Cycles: Theory and Evidence," led by Professor Mayer. Cycles were defined and credit markets, as well as supply and demand fundamentals, examined. Data from the current downturn in the office market was considered to determine the extent to which cycles can be predicted. The session concluded with a discussion of how market participants can operate successfully in a cyclical environment.
Second Panel Session: "Investment Opportunities in the Current Market"
The second panel session, "Investment Opportunities in the Current Market: What Is the Appropriate Risk Premium?" was moderated by Asuka Nakahara, Lecturer in Real Estate and Associate Director of the Zell/Lurie Real Estate Center. Panelists included Joseph Gyourko, Timothy Clark, Cargill Financial Services; Greg Hauser, CEO, Principal Capital Real Estate Investors; and Robert Lieber, Managing Director, Lehman Brothers. The panelists discussed today’s investment climate and examined opportunities in niche segments including retirement communities and urban retail. The panelists also answered questions on risk mitigation methods and expected returns and commented on the investment climates of today, five years ago, and their expectations for 2007.
Luncheon Session: "The Future of Cities"
During lunch, Professor Gyourko addressed "The Future of Cities." There are three important factors presently determining city growth: strong human capital bases, a growing demand for and willingness to pay for locales with a predominance of good weather, and decentralization within the metropolitan area. Having a highly skilled labor force at the beginning of the 1990s was an especially powerful predictor of growth throughout the decade. Professor Gyourko argued that to attract a high human capital workforce, successful cities of the future will need to provide advantages in consumption, not just production. Such attributes as a wide array of goods and services, an efficient fiscal climate for firms and households, and an infrastructure that allows for easy mobility for people and goods around the labor market, are increasingly important for a city to thrive. Such as city will be more of a ‘consumer city’, in contrast to the ‘producer city’ model of old - and will attract the high skill population base that is so critical to urban growth.
Final Session: "Pros and Cons: The CalPERS/Cabot Transaction"
The final session was a case presentation by Professor Mayer; "Pros and Cons: The CalPERS/Cabot Transaction." The case examined the recent $2.1 billion acquisition of Cabot Industrial Trust by CalPERS, the largest public-to-private real estate transaction by a third party. The session participants divided into groups and examined the pros and cons of the transaction from the perspective of hypothetical board members of CalPERS investment committee. The case concluded the following day with a discussion in which groups were called to make short presentations to the class.
The Institute ended after two and a half days of intensive lectures and discussions. Reading materials and group projects supplemented and enriched the classroom experience. The participants were very appreciative of the high level of scholarship and exceptional setting that contributed to a very successful Institute.
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