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2005 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 18.

Richard C. Holbrooke, former U.S. ambassador to the United Nations and chief negotiator of the Dayton Peace Agreement, was the guest dinner speaker. Ambassador Holbrooke spoke on “U.S. Foreign Policy: Its Impact on Business and the Economy.” He discussed the United States’ international image in changing times, the efficacy of our foreign relations policies and personnel, and the difference between waging war on “terror” vs. a war on “terrorists.” Holbrooke is the author of “To End a War,” chosen by the editors of the New York Times Book Review as one of the best books of 1998. Ambassador Holbrooke played a central role in developing U.S. policy toward the Balkans, Africa, Asia and the Middle East during the Clinton Administration. He was chief negotiator at the Dayton Peace Agreement, which ended the war in Bosnia and for which he has received numerous awards, including seven Nobel Peace Prize nominations. Mr. Holbrooke presently is vice chairman of Perseus, a leading private equity firm and merchant bank, and also a regular columnist with the Washington Post.

Wharton School’s Jon M. Huntsman Hall was the venue for the Thursday’s Fall Member’s 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 expresses its 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 more than 300 members, guests and students to the meeting. Bucksbaum reported that Wharton’s real estate enrollment is at a record high, increasing the imperative to help place these students after graduation. Joseph Gyourko, Center Director and Asuka Nakahara, Associate Director, then delivered a State of the Center address. Zell/Lurie now has 52 research sponsorships and 163 sustaining members. In assessing the “state of the center,” Gyourko noted that the center has doubled the number of its faculty since 1998 and is pursuing a goal of developing and publishing research that is influential, “not just clever.” Demand for all real estate courses is strong, he said, and the center plans to grow the student body by recruiting “obvious leaders,” minorities, and women from many locations, including abroad.

The first panel, “A Housing Bubble?,” explored whether the recent increase in residential home values is, in fact, a “bubble” or an indication of actual value. Todd Sinai, associate professor of real estate at Wharton, pointed out that the ratio between the annual cost of owning and renting has not changed, so most current markets do not meet the standard bubble definition: buying based on the expectation that prices will continue to rise. (The San Diego and Miami markets, which Sinai dubbed “a little scary,” may be exceptions.)

David J. Neithercut, president of Equity Residential, noted that job growth is strong in the 20 to 25 markets in which his company is active, and that the company’s apartment occupancy averages 95 percent. Contrary to popular opinion, low interest rates have had little affect on prices, according to Ara K. Hovnanian, president of Hovanian Enterprises. Hovnanian observed that steep increases have occurred primarily in heavily regulated markets such as New York City, which are not representative of the country. Ohio, for instance, has experienced little price appreciation, although Ohioans enjoy the same interest rates as New Yorkers.

The subject then shifted to the possible impact of higher interest rates and the demise of the mortgage-interest deduction. Rather than killing demand, Hovnanian predicted that higher rates would cause buyers to cut back on options: square footages might fall; buyers might opt for cheaper kitchen countertops. First-time buyers will be pushed further toward high-density urban development, which Neithercut termed the “starter housing” of the future. Elimination of the mortgage-interest deduction would produce a “one-time correction,” said Sinai, noting that the deduction is of most value in California and the Northeast, where incomes and real estate values are already high. Hovnanian noted that the second-home market is already hot, even though mortgages on such homes are not deductible.

As an investment, however, real estate made the next set of panelists nervous. Lynne Sagalyn, professor of real estate development and planning, opened “How Does Real Estate Look from the Outside?” by asking how the investment community views real estate. Panelist Kristin A. Gilbertson, chief investment officer for the University of Pennsylvania, acknowledged that the university had had “spectacular” returns of 20 percent to 25 percent in 2004. But Penn, which views itself as a long-term investor, did not expect to repeat the experience. “If rates rise for high-yield bonds,” she said, “real estate would not be able to compete as an investment.” Paul A. Leff, managing director and chief operating officer of Perry Capital, described his organization as preparing for a retrenchment. Perry had added people to its real estate group and is financially prepared to invest in an “opportunistic manner”, possibly in vacation homes and Latin American markets. Leff did not see similar opportunities in distressed U.S. properties. “Now is a good time to sell,” said Barry Winograd, president and CEO of Prudential Investment Management. Winograd cited NCREIF second-quarter 2005 data indicating current-value capitalization rates at 6.4 percent, an all-time low. Gilbertson reported “interesting opportunities” in Japanese real estate, but considered China and India to be speculative, high-risk markets.

Following lunch, The Farash Distinguished Lecturer was Anthony M. Santomero, Ph.D. Santomero is currently president of the Federal Reserve Bank of Philadelphia and former Richard K. Mellon Professor of Finance at the Wharton School. He spoke on “The National Economic Outlook.” Mr. Santomero has written more than 100 articles, books, and monographs on financial sector regulation and economic performance, including Financial Markets, Instruments, and Institutions and Challenges for Modern Central Banking. Santomero said that he is confident that the economy remains on a path of sustained expansion. There is a moderate growth rate in consumer spending and businesses are investing after a hiatus of several years. The labor market is recovering, with unemployment “drifting downwards” and two million net jobs created in 2004. Santomero also stated that the economy is capable of withstanding the pressures of hurricanes Katrina and Rita and the increased price of oil.

Peter Linneman, Sussman professor of real estate at Wharton, moderated “Where are the Hidden Gems in Corporate Real Estate Hiding?” Lubert-Adler Management recently purchased the 200-store Mervyn’s department store chain for $1.2 billion, the value of its real estate. This was possible, explained Dean S. Adler, president of Lubert-Adler, because it had little competition: Mervyn’s is an operating retailer and most real estate people shy away from retail.

Panelist Michael D. Fascitelli, president of Vornado Realty Trust, agreed. Vornado lately acquired the Toys R Us chain, whose highly seasonal business scares those used to regular cash flow. Too many retailers, said Fascitelli, incorrectly value their real estate and thereby incorrectly calculate their profitability. Whether any particular business is a good buy, however, depends on its locations, said Adler. Stand-alone stores give their owners the most autonomy, while mall properties often allow landlords to recapture anchor locations.

The meeting ended with a reminder from John Bucksbaum to save the date for the Spring Members’ Meeting, Thursday and Friday, April 20-21, 2006, at the Rittenhouse Hotel, Philadelphia.

Posted November 2005

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