An array of expert speakers and panelists addressed over 400 participants on April 24 and 25 at the Zell/Lurie Spring Members’ Meeting held at the Rittenhouse Hotel, Philadelphia.
General Clark’s Speech
General Wesley K. Clark (USA, ret.), now Chief Military
Analyst for CNN News and the former NATO Supreme Allied
Commander, was the featured speaker on Thursday evening.
Zell/Lurie Research Sponsors enjoyed an opportunity to meet
him at a special colloquium held before dinner. During dinner,
students and faculty who had received awards were recognized.
Following dinner in the Grand Ballroom, Clark enlightened all attendees with a superb speech on security planning entitled, "An American Strategy for a New Century." Citing potential future national security challenges, Clark focused on international issues. He stated that for the last decade, the US has been operating without a strategy, especially while "we had such a good economy…driving the world, absorbed in our business — not international affairs." This of course changed in 2001. Clark maintained that there are now three strategies to incorporate into US policy, constructed on principles that "…American people can support and sustain year after year." The first is to ensure the US remain an inclusive country, sharing ideas globally; second is convergence with international organizations for collective action in leadership and policy; and third, to use force only as a last measure to protect freedom or maintain peace. "We are at a critical point in American history," said Clark. "How US business leaders develop their priorities and resources will define where this country will be thirty years from now."
First Panel
The first panel on Friday morning, "Underwriting Real Estate
Debt in a Slow Growth Market," was moderated by Chris Mayer,
Associate Professor of Real Estate at Wharton. Panelists were
Alice M. Connell, Managing Director, TIAA-CREF; John R.
Klopp, Vice Chairman & CEO, Capital Trust, and John Weaver,
Executive Vice President, GMAC Commercial Mortgage. In
response to Mayer’s opening statement about the "disconnect"
in debt markets, Connell agreed that a disconnect did exist between
asset level pricing and property market fundamentals. She also
warned of trouble if the "anemic recovery" does not
persist beyond the expiration schedule of some commercial buildings.
However, on a positive note, Connell stated that as a result of the
"real estate depression of the decade," there is an
improvement in transferring equity risk to the equity owner
"where it always belonged." A lively discussion ensued
focusing on a number of current high priorities: exit strategy,
market liquidity created by the capital flow into non-investment
grade instruments, the decrease in risk and the increase of
competition for B pieces and mezzanine debt, and also acquisition
financing on a percentage basis. The panelists agreed that most
equity activity today derives from"… large, income producing,
stable, existing, leased real estate." The panel also discussed
the hospitality industry and how it continues to experience a low
rate bar: in 2001, a 7% decrease nationally; a further reduction by
2½ to 3 percent during 2002; and the expectation that the sector will
be "relatively flat" for 2003. Questions were posed from
attendees as to "new players" in the market. Connell explained
that a "big force" is German banks involved in a "panoply
of debt capital activity." Next year the best investment
opportunities, according to Connell, will be value added transactions,
"where you are on the equity side buying into, and on the debt side
lending into buildings not fully leased."
First Breakout Session: "Thriving in an Increasingly Environmentally
Conscious Society: Is It Possible and For Whom?"
Conference participants could then choose between two breakout sessions.
The first, "Thriving in an Increasingly Environmentally Conscious Society:
Is It Possible and For Whom?" was moderated by Associate Center Director
Asuka Nakahara and included Carl J. Goldberg, Partner, Roseland Property
Company; Stephen C. Jones, Partner, Winston & Strawn and Earl H. Scott,
President & CEO, Premier Environmental Services, Inc. The panel and
participants discussed the newest environmentally hot issue — mold. Scott
examined the two risks: "real," which affects human health, and
"perceived," which outweighs the real risks. Currently, debates exist
over whether there is a link between toxicity and tenant health problems.
Also discussed was "brownfield redevelopment" and how remediation to clean
sites has improved tremendously since insurance-backed consulting firms
are willing to assume the liability if guarantees fall through. However,
in order to develop sites that are either contaminated, located in an
undesirable area, or have transportation shortfalls, developers "need to
improve the school systems and quality of life in those areas." States
are also encouraging the construction of "green buildings" to increase the
number of energy efficient, environmentally sensitive buildings.
Second Breakout Session: "Investment Strategies: Liquidity, Structures
and Return Analysis"
"Investment Strategies: Liquidity, Structures and Return Analysis,"
the second session, was moderated by Wharton real estate professor,
Peter Linneman, and included panelists Keith Barket, Managing
Director, Angelo, Gordon & Company, Richard Kincaid, President and
Trustee, Equity Office; and Barry S. Sternlicht, Chairman & CEO,
Starwood Hotels and Resorts Worldwide. Sternlicht noted that "it
is an unprecedented climate for opportunity funds on the
debt side. You can get a lot of leverage — up to 85%, and a lot of
funds are being raised to provide mezzanine [finance]. One thing
you learn in the opportunity fund business is that you don’t get
lost in the fundamentals." The panelists echoed the first panel of
the morning, noting that European investment cash is growing in the
US, particularly from Germans currently not willing to invest in the
German market. However, the US economy is at an "inflection point."
Rates could lower further; war, terrorism, global depression, the
Asian crisis, and SARS, which has created almost non-existent occupancy
rates, all point to a possible extension of the current economic
situation.
Keynote Speaker: Dr. Patrician Danzon
Our keynote speaker, Dr. Patricia Danzon, Cecilia Moh Professor of
Health Care Systems and Risk Management at Wharton, responded to
the unprecedented surge in drug costs in her address, "The
Growing Problem of High Drug Costs: What Can Be Done?" A
leading national economic expert on the pharmaceutical and medical
industries, Danzon addressed the problems in the health care
industry that led to the elevation in drug expenditures. The
"main drivers," she said, of increased drug costs over other
health care sectors are threefold: First, is an increase in the
number of new drugs that treat heretofore untreatable diseases and
also, new variants of old or less-expensive drugs. The second
increase is growth of insurance coverage "primarily in the private
sector" where the out-of-pocket consumer share is currently less
than 30 percent as compared to 60 percent in 1990. Also factored
in is the per capita expense per prescription of the insured,
which is double that of the non-insured. Last is the
direct-to-consumer (DTC) advertising, a result of consumers’ need
for information and regulated in such a way by the FDA that ads
need not post "risks" but instead just list contact locations,
such as phone numbers, for the consumer to access further
information on the drug. The impact of DTC advertising, Danzon
disclosed, contributes to the "rising volume and the number of
prescriptions."
Afternoon Session: "The Changing Retail Environment: Will the
Favored Sector Stay that Way?"
The first afternoon session, "The Changing Retail Environment: Will
the Favored Sector Stay that Way?" was moderated by Joseph Gyourko,
Martin Bucksbaum Professor of Real Estate & Finance. His panelists,
experts in the real estate, tenant, and retail markets, were: John
Bucksbaum, CEO, General Growth Properties, Inc.Zell/Lurie Advisory Board, Paul R. Carter, President, Wal-Mart
Realty Company, Peter Linneman, Sussman Professor of Real Estate at
Wharton, and Scott A. Wolstein, Chairman, President & CEO,
Developers Diversified Realty Corporation. Gyourko began with a
request for an explanation of the over-performance of retail over
other real estate sectors. The panel collectively agreed that
retail is the most resilient asset class, but the primary reason,
as explained by Bucksbaum, is the "stability of cash flow," as well
as, in many instances, the strong credit and good balance sheets of
tenants. He further observed that a growing population and growing
income levels increase sales. Paul Carter noted that the suburban
migration of the 1950s created a previously non-existent retail
sector that boomed and continued to grow through the 80s. When the
market’s oversupply evened out with the demand by 1990, retail
evolved into new concepts like Wal-Mart. Carter advised, …"as
a retailer, you have to continue to study the consumer [and his/her
needs]." Commenting on the new trend toward development in urban
areas, Wolstein pointed out that developers might well concentrate
on "underserved" areas in African-American, Hispanic, and
Asian markets.
Final Panel Session: "Is There Really a New (Low) Cap Rate
Paradigm for Well-Leased Properties?"
The Grand Ballroom remained filled to capacity for the final
panel session of the day, "Is There Really a New (Low) Cap
Rate Paradigm for Well-Leased Properties?" The panelists were
Robert Lieber, Managing Director, Lehman Brothers, Robert
Pfeiffer, Senior Vice President, GE Capital and Samuel Zell,
Chairman, Equity Group Investments. The moderator was Michael
D. Fascitelli, President of Vornado Realty Trust and vice
chair of the Zell/Lurie Center Advisory Board. Sam Zell, when
asked to reflect on the office real estate sector, responded
that improvement was forthcoming due to the recovery of the
economy. Despite the war, his company realized growth in the
first quarter. Zell felt that the events of 9/11 changed, in
particular, "geo-political definition," and that the emphasis
now will be on "fixing and improving the world." "We are,"
said Zell. "…the country that will have to lead the recovery
of the world." On the downward spiral of cap rates on office
buildings, Lieber commented that the recession is partly to
blame and that some "economic expansion" will occur when the
markets rise. Pfeiffer noted that "it will take some time
before leasing rates improve to the point where values
increase."
With the expectation that suburban property values will increase by the end of next year, the panel encouraged the purchase of real estate. Contemplating this increase, there was talk that pricing, fundamentals, rates, and the job market will all improve with a healthier economy. However, Lieber did perceive a drop in values as rates rise. Countering a remark made by Fascitelli that, "the crash of investments is 5-7 years out…because the buying that leads up to that has just begun…," Zell felt that investors will be safe as long as they "stay debt free."
The meeting ended with a reminder from John Bucksbaum to save the date for the Fall Members’ Meeting — October 21, 2003 on the campus of the University of Pennsylvania. The 2003 Zell/Lurie Real Estate Center Spring Members Meeting was also profiled in articles in Knowledge@Wharton.
Posted May 2003