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2004 Fall Members’ Meeting Summary

This year’s Fall Members’ Meeting began with the Max M. Farash Real Estate Roundtable, an enlightening evening for Research Sponsors, Executive Committee members, faculty, and special guests. The event was held at the Rittenhouse Hotel, Philadelphia, on Tuesday evening, October 26.

Jeremy Peat, Group Chief Economist, The Royal Bank of Scotland was the guest dinner speaker. Peat spoke on “Changes in the World Economy,” and described a range of key issues likely to influence developments into 2005 and beyond. He highlighted higher oil prices as adding to uncertainty and questioned how long the present ‘soft patch’ will endure. He also addressed how global imbalances will unwind- not least the twin deficits in the US, whether the Eurozone can re-emerge as a major contributor to global growth and the impact of the emergence of two new economic giants, China and India.

The Wharton School’s newest and most innovative building, Jon M. Huntsman Hall was the much-lauded venue for Wednesday’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 this year’s record number of members who have volunteered their time for a most worthwhile and much appreciated program.

Following breakfast, John Bucksbaum, Chair of the Advisory Board of the Zell/Lurie Real Estate Center welcomed members, guests and students to the meeting. Joseph Gyourko, Center Director and Asuka Nakahara, Associate Director, then delivered a State of the Center address. “We strive to be thought leaders,” said Gyourko. “We provide applicable industry research, offer an excellent education and host programs that build a bridge between industry, students and faculty.” He continued by outlining the research agenda for 2004/2005 and also welcomed two new faculty members, Fernando Ferreira and Grace Wong. Nakahara noted that industry interest is at an all time high. Thirty companies attended the fourth annual real estate job fair in January. The career mentor program has over 100 mentors matched to students from diverse schools at the university, all of whom are considering a career in real estate. “Student interest continues to rise,” said Nakahara, “there are four real estate clubs on campus and the newly expanded curriculum has been well received.”

The enormous velocity in sales and consistent value appreciation in what is deemed a “chancy” market was the topic of the first panel session, The Second Home and Condo Market: Are They Too Good to Be True? moderated by Asuka Nakahara. There has been a change in resort living in that more buyers are families as opposed to empty-nesters who had previously dominated the market, explained panelist John Davison, senior vice president, Residence Clubs, Four Seasons Hotels and Resorts. Wharton professor Susan Wachter shared statistics reflecting the status of the market. Only 8% of people own second homes. The average age of these owners is 61 and their median income is $76,000. These homes are scarce and buying is at an all-time high. Prices are increasing and in some areas the percentage of buyers has doubled. Eighty percent buy for lifestyle reasons rather than for investment purposes. “Over the past five years there has been an incredible increase in our volume. We continue to be amazed by how resilient it is,” said panelist Edward Coco, managing director of GE Real Estate. There are concerns that rising interest rates will hurt the market, but Bobby Ginn, president of the Ginn Company, a private real estate development and management firm that creates leisure lifestyle and resort communities in the Southeast, says people who retire to Florida aren’t stopped by interest rates because they’ve been planning years in advance.

The second panel, “Mega-projects in Real Estate: Where are they and how do they work?” was moderated by Wharton professor Peter Linneman. The panelists, all of whom work in the billion dollar transaction arena, included Thomas J. Barrack, Jr., president and CEO of Colony Capital; John Bucksbaum; Ronald J. Kravit, managing director, Blackacre Capital Group L.P; and Owen D. Thomas, managing director of Morgan Stanley and president of the firm’s real estate private equity funds.

Linneman asked how the panelists’ companies avoided being the highest bidder while still remaining highly profitable. “Money is the least important transaction today. It’s just a commodity. You need control,” said Barrack. “Was there ever a point in these transactions when you said to yourself, ‘I’m done? No more?'” asked Linneman. “In large deals there is a pattern of excitement. Then it seems to flatten out. But it still gets scary at certain points,” said Bucksbaum. “The worst thing you can do is stop business growth. But you have to ask yourself if you are risking the business.”

The panelists debated the ease versus discomfort of the huge transaction. Barrack referred to a recent multi-billion dollar transaction of Caesar’s in Las Vegas, which happened in just 18 days. “We had a much easier time in a multi-billion dollar transaction than we would in a smaller transaction,” he said. “Dealing a big deal with a sophisticated seller is much better than dealing with a small deal with an unsophisticated one.” When asked about hindsight, the panelists concurred that some of their deals might have benefited from a more aggressive stance and courage of convictions.

At lunch, Center Director Joe Gyourko gratefully acknowledged new contributions and pledges received during the year. From Dean Adler and his wife, Susanna Lachs, an endowment was established to support the teaching and research of real estate entrepreneurship in the real estate program at Wharton. Through the initiative and a leadership gift provided by Brad Klatt, as well as a substantial contribution from Robert Toll, a growing permanent endowment for the support and teaching of real estate development at Wharton. From Sylvia Olnick, with the encouragement of Neil Rubler, the continuing support of the Robert Olnick Memorial Fund provides the resources for the development of new case studies throughout our real estate program, as well as stipends to superior students. And from Ron Rubin, Jon Weller and Ed Glickman of Pennsylvania Real Estate Investment Trust, an educational endowment in memory of Sylvan Cohen was established to provide scholarship monies to students interested in pursuing a career in real estate.

The Farash Distinguished Lecturer was Michael Barone, a senior writer at US News and World Report. He is co-author of the Almanac of American Politics and has worked as a lawyer and political scientist. His topical lecture “Politics 2004” focused on the presidential campaign. “I study election returns. Other reporters move on the next story,” he said. “Election returns show a pattern of division and the polls this year look like previous election results.” Barone pointed out that pre-election polls were divided by religion – not by income, race or economic status. He also noted that this election involved new media, such as Internet BLOGS. Barone concluded that the “rise in civic involvement and engagement is a positive result of this bitterly fought presidential campaign.”

The final panel, “Financing Different Types of Real Estate Companies: What Does Capital Require Today?” was moderated by Professor Gyourko. The 1990s saw the rise of new types of firms, ranging from public REITs to private equity companies. The past decade also saw the expansion of the investor base interested in real estate. Panelists from companies with different structures discussed the shift and what is needed to attract capital successfully in the future. “Is this shift temporary or permanent?” asked Gyourko. “These paradigm shifts have been in flows of capital to real estate since 2001, including long term investments in real estate, many of which are receiving higher returns,” responded panelist Steve Roth, chairman and CEO of Vornado Realty Trust. Panelist David Steinwedell, chief investment officer of Wells Real Estate Funds added, “Wells has been able to tap into the section of the market that hasn’t been able to get into real estate. Those who haven’t been on our side of the business are now buying into real estate as part of their investment portfolio. Wells has conservative investors, he continued. “They had originally thought they were in it for income to pay mortgages, bills, etc. But instead, they were seeing a 70% dividend reinvestment. Thus, investors are looking for capital preservation as well as income.”

The subject shifted to how investors may or may not shape a business plan. Stuart Rothenberg, managing director of Goldman, Sachs & Company, explained they don’t affect Goldman’s business plan. “Their investors are told up-front that there are no annual meetings and no fee deals. Their investment is a partnership. And they trust the knowledge of the company.” Business plans in the public market may be more influenced by investors. “Everyone has someone to report to-whether it’s the public market or 70,000 phone calls from investors,” said Steinwedell.

On the subject of types of borrowers, Tom MacManus, president of GMAC Commercial Mortgage, said, “I think because of the positive leverage in the market there are more private investors, using more of other people’s money and less of their own.”

“How do you see general economic risks spilling over into real estate investing?” asked Gyourko. “Our biggest concern is rates moving ahead of recovery,” said MacManus. Roth cautioned, “The world is full of failed investors who tried to guess the interest rates. If you try to run a business, you have to have a feeling for the bigger picture instead of the little movements.”

The meeting ended with a reminder from John Bucksbaum to save the date for the Spring Members’ Meeting – April 21 & 22, 2005 at the Rittenhouse Hotel.

Posted November 2004

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