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2004 Spring Members’ Meeting Summary

The 2004 Zell/Lurie Real Estate Center Spring Members’ Meeting was an overwhelming success, attracting over 500 participants, speakers and panelists, the largest number ever.

Harvard University President Dr. Lawrence Summers was the guest dinner speaker on Thursday night. His long record of public service includes positions as Secretary of the Treasury (1999-2001) and Vice President of Development Economics and Chief Economist of the World Bank.

Summers’ address focused on “the central challenges and opportunities we face as a country and the role major universities can play.” The three areas he noted were the genomics revolution under way in science, America’s role in a complex world, and providing equal opportunity in education.

Current research on sequencing the human gene provides “a staggering potential for understanding disease and finding cures” said Summers, reminding the audience that government funded research at the nation’s universities plays a critical role in this progress. Our competitiveness as a nation depends on how we grapple with progress and keep pace with scientific learning. The understanding of the United States in and by the world is changing. Foreign attitudes toward the United States have changed, and we face a serious situation in that we can be “very insular” in our attitudes. Fostering connections with other countries, Summers said, are done best through and by our schools. Hard and serious scholarly work of understanding other societies and nation building are essential.

Summers’ urged recognition of the most serious domestic problem in the United States: the widening gap between the children of the rich and the children of the poor over the last generation, impacting education and intergenerational mobility. “Even the weakest rich go to better schools than the strongest poor,” said Summers, relating gaps in attendance and graduation rates to the ability to pay for college. Summers called for equal opportunity of education for children of all socio-economic groups “just as we did for racial inclusion in the past.” Education is not a discretionary expense, exhorted Summers; it is a necessary investment in the future of the next generation, and thus, the future of the nation.

Keynote speaker Peter G. Peterson launched the Friday morning program. He is chairman and co-founder of the Blackstone Group, a private investment banking firm; chairman of the Federal Reserve Bank of New York, and chairman of the Council on Foreign Relations.

Peterson spoke on “Corporate Scandals: The Whys, The Whats, and What Can Be Done About It,” examining the decline of public and investor confidence in companies, their leaders and American capital markets in the wake of several notorious business failures in recent years. Maintaining the public’s trust, however, is essential since “America is ravenous for other people’s capital,” and borrows over 5 percent of its gross domestic product to finance entitlement programs, resulting in a staggering federal deficit. Our ability to borrow depends on other’s trust in us as a country, said Peterson.

Although Peterson expressed grave concern over the current state of corporate affairs, he made recommendations aimed to restore the public’s trust in three critical areas: executive compensation; corporate governance; and audit and accounting. In the area of executive compensation, Peterson urged “private sector leadership” of CEOs and stockholders, to utilize plain-English annual reports that clearly detail executive compensation, time requirements for executives to hold their stock, and a clear notice requirement for sales of stock. Adequate corporate governance requires an appropriate balance of powers between CEO’s and corporate boards to protect shareholders. “Keep outside firms outside” Peterson advised, to remedy conflicts of interest arising from auditors and lawyers who see company management as their clients rather than the board of directors. Outside firms are “reluctant to bite the [management] hand that feeds them” said Peterson, but this could be avoided by having board supervision and an independent director take charge of hiring and firing service providers and by placing restrictions on some services. You are invited to view the report on which Peterson’s presentation was based.

The meeting’s first panel, “Legends of the Real Estate Industry,” featured Gerald Hines, chairman of Hines; Walter H. Shorenstein, founder of the Shorenstein Company; and A. Alfred Taubman, former chairman of the Taubman Group. Wharton professor Peter Linneman moderated the discussion and began by asking the men to recall their origins and their first projects. Hines began in the steel mills, and got into development through mechanical engineering. He recalled his first project was a 500-sq.-ft. warehouse, which got him interested in architecture and design. With his professional origins in retail and as an Army quartermaster, Shorenstein started his career in real estate as a broker. Mall king Taubman first store was Ray’s Bridal in Flint, Michigan, which grew into a 26-store chain. Their favorite buildings? For Hines, it’s the Seagram Building in New York. For Shorenstein, it’s the Bank of American Building in San Francisco, which he owns. Taubman’s hands-down favorite is the National Museum in Washington, D.C.: “It has a great plan, with no gimmicks: it’s pure planning,” he said. “Why is there so much bad space out there?” asked Linneman. Hines felt it was due to inexperience and corporate egos with too much money. Shorenstein said too many buildings “are designed from the outside in,” when they should be designed from the inside out for maximum tenant use. Taubman noted that there are marketing errors. “Location has to do with access,” he said, and some office buildings are in “marginal areas.”

Dean S. Adler, president of Lubert-Adler Partners, LP moderated “Adaptive Re-use of Failed/Bankrupt Space,” with panelists Bradford Korzen, principal and CEO of Kor Realty Group; Bruce C. Ratner, president and CEO of Forest City Ratner Companies; and Joyce Storm, president of JSS Advisors, LLC. Panelists discussed the increase in failed space in the real estate industry, and the opportunities and risks associated with reusing this space. They also discussed the various risks and rewards in various property types, and who was best suited and least suited to reuse. Adler noted this field was the “most entrepreneurial and profitable, secondary to financing,” and that “vision, execution and management” could ensure successful revitalization of urban areas. Korzen spoke about why downtown Los Angeles failed and why it is coming back. He said LA’s revival was atypical, due to a housing crunch. Following the model set by other cities, notably Chicago 15 years ago, balmy Los Angeles, with its “great buildings and great design.” began to appeal to East Coast “city people.”

“What Does Credit Mean in Today’s World?” moderator Asuka Nakahara, associate director of the Zell/Lurie Real Estate Center engaged panelists Christopher N. Brown, principal of Banc of America Securities LLC; Arlene Isaacs-Lowe, senior vice president of Moody’s Investor Service; Stephen E. Sterrett, chief financial officer, Simon Property Group, Inc.; and Marsha Williams, executive vice president and chief financial officer of Equity Office Properties Trust. They discussed what credit meant over the life of the lease now, when in recent years, landlords have seen first-rate clients tenants such as Enron, K-Mart, Arthur Andersen, and Toys ‘R Us suddenly disappear. Each panelist offered methods to better evaluate credit. They considered whether returns had adjusted to the new realities of volatile creditworthiness, and how changes had affected the different property sectors, property owners and investors. Future trends in credit analysis? Williams sees a greater emphasis on clearer, more timely financial disclosure; Brown thinks the people most successful at measuring risk are those open to looking at all sources of information; Sterrett believes the Sarbanes-Oxley Act legislating disclosure basically formalizes the informal policies of well run companies, therefore it won’t have much impact on them; Isaacs-Lowe added that the government can’t legislate integrity.

Joseph Gyourko moderated “Has Real Estate Gotten Out of Sync with the Economy?,” Panelists were Michael D. Fascitelli, president of Vornado Realty Trust; Raymond C. Mikulich, managing director of Lehman Brothers; Joseph E. Robert Jr., chairman and CEO of J.E. Robert Companies, Inc.; and Richard B. Saltzman, president of Colony Capital LLC. Gyourko noted that the recovery is here, but job growth remains low by historical standards. At the same time, real property returns and prices have been quite high in many markets and across various property types. Panelists discussed what this means for investors and owners, which sectors are at most risk, and why. Saltzman stated real estate was neglected in the 1990’s, then investors woke up and shifted capital into real estate, but now the pendulum has swung too far toward overvalued direction. Mikulich commented that yield is affected by interest rates. New challenges to the industry? Fascitelli sees one in the size of the funds involved; Roberts believes the transfer of institutional leadership to newer, younger people poses a new challenge; Saltzman predicts consolidation in the real estate industry because not all companies will perform well.

Peter Linneman enjoyed his “Conversation with Sam Zell,” as they addressed the question, “What Is Right and Wrong about Real Estate?” They agreed that REITs are still “an extraordinarily attractive investment,” in spite of the economy’s ups and downs. When their conversation turned to politics, Sam voiced some concerns about the partisanship in the government, and increasing protectionism that in 1939 “took us into a depression.” He declared outsourcing is a way of life in this new world and added “the government should focus on protecting our intellectual property rights, our greatest resource and export.” Even with their concerns about the federal deficit (noting the country’s resiliency), they were optimistic in general and agreed “the economy is really cranking,” with significant increases in activity levels and hiring across the board.

The meeting ended with a reminder from John Bucksbaum, chairman of the Zell/Lurie Advisory Board to save the date for the Fall Members’ Meeting to be held on Wednesday, October 27, 2004 at the University of Pennsylvania, Houston Hall, 3417 Spruce Street, Philadelphia. Next year’s Spring Members’ Meeting is April 21-22, 2005 at the Rittenhouse Hotel, Philadelphia.

Posted May 2004

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