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."
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