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2001 Fall Members’ Meeting Summary

This year’s Fall Members’ Meeting once again provided an extraordinary forum for our members, faculty and students to share their expertise and discuss relevant industry concerns.

Max M. Farash Real Estate Roundtable

On November 5, at The Rittenhouse, the 2001 Fall Members’ Meeting was initiated with a newly formatted Max M. Farash Real Estate Roundtable discussion. Max Farash hosted 28 Research Sponsors and seven members of the Wharton Real Estate faculty. The roundtable discussed Changing Societal and Technological Conditions in Our Society, facilitated by two eminent University of Pennsylvania professors, Douglas Massey and David Farber. Each presented considerations within his area of expertise — immigration policy and technology issues, respectively. It was a stimulating and informative evening, crowned with an absolutely perfect dinner created by David Marshall’s superb culinary staff.

Career Mentors’ Meeting

The Hilton at Penn was the venue for Tuesday’s Fall Members’ Meeting. Members who enrolled in our Career Mentor Program started the day early, meeting with students over breakfast. The real estate majors who have been paired with industry leaders enjoyed this unique opportunity to acquire insights gained from their Mentor’s professional experience. The Zell/Lurie Real Estate Center would like to take this opportunity to express sincere thanks to all members who have volunteered their time for this most worthwhile and much appreciated program.

Following breakfast, over 200 people packed the Woodland Ballroom to be welcomed by Advisory Board Chair, Lizanne Galbreath, and to hear Center Director Joseph Gyourko deliver the State of the Center address.

First Panel Discussion: Smart Growth

The first panel of the morning addressed the issue of smart growth. Moderator J. Ronald Terwilliger, national managing partner for Trammell Crow Residential, said continued U.S. population growth, combined with a shift of offices to the suburbs, created additional demand for development into the exurbs which set off environmental and traffic problems. "It seems that in the 90s it all caught up with us." Terwilliger, former president of the Urban Land Institute, noted that smart growth does not translate to "anti-growth" or "anti-suburban." The Urban Land Institute defines smart growth as development resulting from policies that are economically and environmentally sound and create sustainable communities. In practice that generally means flexible zoning that mixes residential and commercial development in a higher density than is traditional for suburban markets. Terwilliger observed that developers who strive for smart growth are too often trumped by neighborhood opposition. Panelist Gary Hack, dean of the Graduate School of Fine Arts at the University of Pennsylvania, said that one way to diminish pressure to develop suburban sprawl is to revitalize communities that already exist in the nation’s cities. He proposed the idea of intermediate density, in which city parcels are redeveloped at a lower density with some suburban traits, such as on-site parking and small backyards. Bradford Klatt, co-managing partner of the Roseland Property Company, a New Jersey firm specializing in redevelopment projects, laid out the complexities of redeveloping an urban site. He said that in an urban setting there is likely to be a need for environmental remediation and attention to geo-technical conditions. Panelist Stephen Ross, chairman and chief executive of The Related Companies, said massive urban redevelopment projects require great input from public officials, both in planning and financial incentives. His most successful projects have been in cities that had a good idea of what they wanted. Karen L. Martynick, vice chairman of the Board of Commissioners in Chester County, a rural county outside Philadelphia that is facing tremendous pressure to develop open land, gave the view of a public official. She said suburban residents are likely to object to any development – smart or not.

Break-Out Session: Investing in Real Estate Equity and Debt: The View from the Demand Side

Wharton Real Estate Professor Chris Mayer moderated Break-Out Session A: Investing in Real Estate Equity and Debt: The View from the Demand Side. Panelist Dean S. Adler, president of Lubert-Adler Partners in Philadelphia, observed that developers may be less able to negotiate their way out of a default in this recession because many of their properties are now financed with commercial mortgage-backed securities that spread across many owners rather than a single bank or institutional lender. "We’re going to see a significant decline in cash flows, a significant decline in valuations and this is no short-term issue," he said. Eric Lindner, executive vice president of GMAC Commercial Mortgage, was somewhat more optimistic. His company has not seen an increase in defaults, he said, and is equipped to process them if necessary. "A lot of people are focused on this. It is complicated, but I think for those who use common sense and have good real estate skills there will be good opportunities. This is the first time we have gone into a slowdown where there wasn’t a huge oversupply of real estate." Cydney Donnell, managing director of European Investors Inc., agreed this downturn will not be as harsh as the last one that forced many developers to seek bankruptcy court protection for their projects. "I’m not as concerned as I was in the 80s. It was not fun to stand out on the courthouse steps. There are projects that are going to be dogs, but there are going to be other opportunities." In her opinion, real estate may be poised for a renaissance. "I think that in 10 years you are going to find that real estate will have acquired new-found respect."

Break-Out Session: "What is Going on Outside the US?"

Professor Peter Linneman moderated Break-Out Session B, "What is Going on Outside the US?" Arnold de Haan, managing director of Commerz Grundbesitz Invest. GmbH, began by describing the open-end real estate funds of Germany and their sources of capital and investment strategy, noting that the investors in these funds tend to be retail-oriented, and value the low-risk profile of these funds as well as their open market liquidity. In order to achieve attractive returns, it is necessary to expose oneself to some development risk. He felt that London and France were probably past their peak, and that Germany also remains difficult. Martin Landau, deputy chairman of Development Securities plc, added that as a developer he seeks to eliminate risks, rather than taking risks. Development in Europe is a much more difficult political and regulatory process than is the case in the United States. London still offered opportunities, though the market is probably past its peak. Jay Mantz, managing director of Morgan Stanley, has found that privatizations remain attractive opportunities in Europe. All of the panelists indicated that in the long-term, European demographics present a challenge to office properties, as the declining population base will erode potential demand for office space. They also were aware that as European banks require higher returns on equity, it will have some adverse consequences for real estate pricing in Europe. They believe that economic reverberations will be felt throughout the globe as the economics slow down the United States spreads. The greatest difficulty of investing outside of the United States is that markets are not as transparent or as liquid, and a greater degree of local knowledge is required. The regulatory environments also pose much greater challenges for those who wish to invest outside of the United States.

Luncheon Speakers

At lunch, Professor Peter Linneman memorialized founding member Sylvan Cohen, who died on September 8th. Sylvan and his wife Alma had been particularly proud of an unbroken record of attendance at the Real Estate Center Members’ Meetings and Alma’s presence at this Fall Meeting ensured that the record remains unbroken. Sylvan’s wise counsel will be sorely missed. Professor Brendan O’Leary, an expert on terrorism and professor of Political Science at the London School of Economics, currently in residence at the University of Pennsylvania, was the guest luncheon speaker He spoke on Political Violence – Combating It and Living with It in an Open Society.

Farash Distinguished Lecture

The Farash Distinguished Lecturer this year was Allen Sinai, chief economist and president of Decisions Economics, Inc., in New York. Dr. Sinai forecast a recession that could continue through 2002 and possibly stretch into the first quarter of 2003, but he did add that the economy has already absorbed six to nine months of the slowdown. The current recession presents an unusual pattern, he noted, because it began in the industrial sector with a glut in technology, not in the real estate and consumer arenas, which typically start a slowdown that spreads to industry. "In a complicated and difficult world filled with risk and potential for disappointment, my guess is that a year from now things will look relatively bright. At this moment, though, I can’t promise you a rose garden for the next 6 to 12 months."

Final Panel: Running Different Types of Real Estate Companies in a Slow Economy

The Director of the Zell/Lurie Real Estate Center, Martin Bucksbaum Professor Joseph Gyourko, moderated the final panel of the day, "Running Different Types of Real Estate Companies in a Slow Economy." "There’s no doubt we are in a slowing economy and we need to think about how to run our companies," he said. Michael Balaban, president of Lowe Enterprises Mid-Atlantic, Inc. offered his own outlook for the industry. Many projects and markets remain strong despite the recession and the Sept. 11 terrorist attacks, he said, while others, particularly hospitality, are under strain. At the same time, the situation has created new opportunities in leasing and finance. "Private capital endowments and foundations and high net-worth individuals are whispering in our ear about things they would like us to consider on their behalf," he noted. Panelist Ron Uretta, chief operating officer of Insignia Financial Group in New York, said tenants are more cautious and many have put space they had hoped to use for their own expansion onto the market as sub-lease space. "What

we’re seeing now is a hesitance on the part of tenants or owners to make long-term decisions with regard to occupancy needs," Scott A. Wolstein, chairman of Developers Diversified Realty Corp., which specializes in retail space, observed that most of the retail softening has been at the top end of the market. "Retailers are honoring commitments through next year; as to 2003, there’s a great deal of uncertainty. The current low interest rates are a mixed blessing for developers because the economic conditions creating them are at the same time giving rise to tougher underwriting standards. It’s a classic case of the rich get richer. Companies with strong balance sheets will be able to snap up available land or redevelopment projects even more cheaply". David Marshall, chairman and chief executive of Amerimar Realty Co., is working through the slowdown at his hotel property by cross-training employees. For example, an assistant restaurant manager may be trained to make sales calls to drum up new business that will allow him to return to his original position. "There is a lot to be said for loyalty. If you show loyalty to employees in tough times they’re going to bust it for you when times get good."

The Advisory Board Chair, Lizanne Galbreath, closed the meeting and reminded all participants that the Spring Members’ Meeting will be held on April 18th and 19th, 2002 at The Rittenhouse.

An in-depth report of the Fall Members’ Meeting, is available at Knowledge @ Wharton

Posted November 2001

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