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2005 Spring Members’ Meeting Summary

An array of expert speakers and panelists addressed more than 400 participants on April 21 and 22 at the Zell/Lurie Spring Members’ Meeting held at the Rittenhouse Hotel, Philadelphia.

Dr. Arthur Caplan, the Emmanuel and Robert Hart Professor of Bioethics and Chair of the Department of Medical Ethics at Penn’s Medical School, was the featured speaker on Thursday evening. Dr. Caplan provided fascinating insights into the challenges facing biomedicine in the 21st century and key ethical issues arising from new technologies that have profound implications for our future. Dinner was preceded by recognition of students and faculty who had received awards.

On Friday morning, John Bucksbaum, Chair of the Advisory Board of the Zell/Lurie Real Estate Center and Joseph Gyourko, Center Director, extended a warm welcome to the attending members and guests.

The first panel, The Demographics of Jobs: Implications for Real Estate, explored the effects of demographics on future jobs patterns and the demand for industrial real estate, distribution facilities and office space. Moderator Lynne Sagalyn, Wharton School professor of real estate development and planning, opened the discussion by identifying three economic trends affecting real estate: an unstoppable demographic trend; changes in the distribution, shipping and storing of goods; and changing global shipping patterns. Susan Hudson-Wilson, founder of Property & Portfolio Research, explained that changing demographics are creating labor and productivity crises. Baby Boomers are leaving the workplace, creating a labor shortage, while the Echo Boomers taking up these positions are causing overall productivity growth to fall. Rosemary Scanlon, associate professor of economics at New York University and former chief economist of the Port Authority of New York and New Jersey, however, proposed immigration is a solution to the U.S. labor shortage. These demographic changes affect real estate in that Baby Boomers are selling their suburban homes and Echo Boomers are moving to more attractive urban settings. This leaves little demand for the suburban homes and greater pressure on private industry to attract new workers.

The subject then shifted to changing global shipping patterns, to which Paul Congleton, managing director of ProLogis, forecasted problems with traffic and poor infrastructure. “80 percent of all world trade is moved by sea. Once the goods get to shore, we will see that 90 percent will be moved by truck,” he explained. All panelists agreed that this pattern requires distribution centers to be near large metropolitan areas.

While the previous night’s featured speaker spoke on ethics in biomedicine, this year’s keynote speaker, the Honorable Eliot Spitzer, Attorney General of New York, spoke on ethics in the capital markets. Zell/Lurie Research Sponsors enjoyed an opportunity to meet privately with Attorney General Spitzer prior to his address.

Together, Joseph Gyourko, Martin Bucksbaum Professor of Real Estate at The Wharton School, and Anita Summers, emeritus professor of public policy, management and education at The Wharton School, presented The Rise in Development Restrictions across America: An Update on a New Wharton Real Estate Survey. Gyourko began by tracing the rising value of land over physical construction costs of real estate since the 1940’s. He cited physical and artificial restrictions on supply as the two theories explaining the rise in land costs, although Gyourko agreed with the latter. Summers then presented the findings of the Wharton Land Use Regulation Survey, which was initiated 14 years ago due to a lack of a consistent, nation-wide database of its kind. Two surveys have been conducted: one nationwide survey, sent to 6,900 jurisdictions, with a 37 percent response rate; and one throughout the Philadelphia metropolitan area, sent to all jurisdictions, with a 60 percent response rate. The survey shows local regulatory environments have no material correlation with population or community. Rather, it is higher house prices, household incomes and percentage of college graduates that affect the regulations. Gyourko and Summers, reporting widespread interest in their survey project, said they look forward to non-residential real estate interest and pledged updated data every five years.

Following lunch, Asuka Nakahara, associate director of the Zell/Lurie Real Estate Center, led a discussion on What is Driving Debt Markets in Real Estate? While the markedly increased competition in the lending market is good for Americans, lenders are seeing new challenges. Alice M. Connell, managing director of TIAA-CREF, has seen a deterioration of underwriting standards that result in no-escrow, no-equity and “neurotic” 10-year interest-only deals. When asked whether or not it would be better to be a borrower in the future, Connell replied, “It’s irrational not to lock in today,” claiming, “It doesn’t make any sense to wait for lower rates.” Eric Schwartz, managing director of Deutsche Bank, explained that the many assets that had loans that weren’t locked are a considerable reason why today’s market is the way it is. Robert Cherry, chief investment officer of LNR Property Corporation, explained that lenders aren’t making nearly as much money as they were in the early nineties. Commenting on the outlook of today’s lenders, Michelle K. Felman, executive vice president of Vornado Realty Trust, said, “What looked like risk in the early nineties is nothing compared to today.”

The conversation ended with each panelist’s view of the condo market. When asked if he or she would write up a deal today on a condo, each panelist offered a different view. While Connell immediately said no, Felman said she had just written up a condo deal the previous day. Felman predicted the second home market to be very viable. Cherry explained that the condo market is unsophisticated; 50 percent to 70 percent of all condo buyers in South Florida are investors.

Peter Linneman, Wharton School Sussman Professor of Real Estate, moderated A Conversation with Samuel Zell and Barry Sternlicht, a thought-provoking conversation between two industry leaders, Samuel Zell, founder and chairman of Equity Group Investments, LLC and provider of the Center’s permanent endowment, and Barry Sternlicht, executive chairman of Equity Group Investments, LLC, on the challenges confronting real estate investors today. Sternlicht’s first comment about the state of the industry was, “We just hope we’re still sitting in a chair when the music stops.” He explained that the real estate industry is no longer a single, isolated market. Rather, it’s part of the overall capital markets. Zell explained, “Replacement cost is the only network that works in this business.” The conversation then shifted to inflation rates. Zell explained that real estate is now subject to twice the inflation rate, to which Sternlicht replied, “If you’re really concerned with inflation coming back, you really want to own.” On the subject of the public sector versus the private sector, Zell expressed a need for Sarbanes-Oxley to be reformed, citing the Act as horrendous. Though it’s needed for politicians, Zell claimed the Act would be much more acceptable if corporations had to comply every ten years instead of every year. The panel ended with questions from the audience. When asked about the residential markets of India and China, Sternlicht forecasted a very strong market for India, and compared China to the Wild West.

The meeting ended with a reminder from John Bucksbaum, Chair of the Zell/Lurie Advisory Board, to save the date for the Fall Members’ Meeting, Wednesday, October 19, 2005 on the campus of the University of Pennsylvania. Next year’s Spring Members’ Meeting will take place on April 20-21, 2006 at the Rittenhouse Hotel, Philadelphia.

Posted May 2005

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