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2006 Fall Members’ Meeting Summary

This year’s Fall Members’ Meeting began on the evening of November 1 with the Max M. Farash Real Estate Roundtable, an enlightening evening for more than 50 Research Sponsors, Executive Committee members, faculty, and special guests. After an excellent dinner at the Rittenhouse Hotel, Center Director Joe Gyourko and Professor Peter Linneman led a discussion on “Pricing in the Commercial Property and Housing Markets.” The roundtable focused on whether cap rates can be sustained in today’s interest rate environment, and what will happen to cap rates if interest rates rise. The participants also discussed whether there would be a collapse in housing prices, and how conditions in the housing market will affect other parts of real estate and the broader economy.

Hillel at Steinhardt Hall on the University of Pennsylvania campus was the venue for Wednesday’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, out-going chairman of the Advisory Board of the Zell/Lurie Real Estate Center, welcomed more than 300 members, guests and students to the meeting. Joe Gyourko, Center Director and Asuka Nakahara, associate director, then delivered a State of the Center address. Concluding the State of the Center, Professor Gyourko praised John Bucksbaum, who is stepping down after two terms as chairman, saying, “He leaves the Center better than he found it.” Gyourko presented Bucksbaum with a commemorative book of photographs and other memories of his tenure. Michael Fascitelli, president of Vornado Realty Trust, is the board’s new chairman, with vice chairman Robert Lieber, managing director of Lehman Brothers.

The first panel, “Global Hot Spots-How to Think about Hot Foreign Markets,” moderated by Peter Linneman, began with a question about where in the world the panelists would put their money on a risk-adjusted basis. Germany, India, China and Japan were all mentioned. Stuart Rothenberg, a partner with Goldman, Sachs & Co., explained why his firm is attracted to Germany: product, yield on product, yield, and leverage. “If you look in many places, you’ll find one but not all of these things,” he said. Surendra Hiranandani, managing director of Hiranandani Group in Mumbai, said India had a 6 percent to 8 percent sustained growth rate two years ago and a 54 percent home loan market growth per year. Other improvements including a transparency index higher than any other country. Hiranandani added that Indian students educated in the U.S. actually want to come back to India. “Mindset plays an important part in markets,” he said. “The hero image used to be Gandhi. Now it’s Bill Gates.”

Michael Pralle, president and CEO of GE Real Estate, commented that whenever his company went into a new market, they identified a local partner to work with to understand the legal framework and regulatory factors. “We like Japan,” he said, pointing to a 4-1/2 to 7 or 8 percent yield outside the cities and real estate prices nowhere near historical peaks. “Good tax benefits can generate 30 to 40 percent above normal returns.” China is much more complicated because the markets are volatile. Keith Barket, senior managing director of Angelo Gordon, also pointed out how 50 percent of the people were moving from farms into the cities. “We expect half of what we do will be developed with residential development deals producing a 25 percent to 30 percent profit margin. Nobody drops out if the market drops 5 percent.”

The second panel, “Financial Engineering and Structured Finance in Real Estate: What Does the New Era Hold?” was moderated by Joseph Gyourko. Panelist John Klopp, CEO of Capital Trust, said that with cap rates down the result is a much more fragile lending environment and people are taking risks they weren’t in the past. Tad Philipp, managing director of Moody’s Investor’s Service, warned of a “slow, relentless creep” of bad underwriting, higher LTVs and less amortization. “The lines between debt and equity are beginning to blur,” he said. Brad Carpenter, managing director of Lehman Brothers, added, “We’ve seen dramatic declines in structure. The fact there’s a finite supply and a huge increase in entrants to this market, the structure will start to weaken.” On the debt side it used to be traditional lenders (banks and securities), pointed out Spencer Haber, CEO of H/2 Capital Partners. “Now it’s mezzanine funds.” Haber counters any gloom and doom, adding the industry is less volatile and there’s greater transparency than 15 to 20 years ago.

Lunch was followed by "Before (and After) the Deluge: The Elections and Their Aftermath" with Norman Ornstein, resident scholar at the American Enterprise Institute for Public Policy Research and election analyst for CBS News. Before a packed room, the self-proclaimed “raging moderate” opened with light-hearted jokes and jabs at both Republicans and Democrats.

In the final session of the day, “The ‘Why’ of Recent Big Deals and Their Implications for the Property and Capital Markets,” moderated by Asuka Nakahara, Timothy Callahan, president of Trizec Properties, talked about his company’s acquisition of Arden. When Blackstone & Brookfield bid on Trizec, they were looking for an expansion of their national platform and wanted to be part of an operating company. “The time we spent on the Arden portfolio made it attractive to Blackstone & Brookfield,” says Callahan. Lee Neibart, senior partner of Apollo Real Estate Advisors, focused on his company’s acquisition of interest in Lord & Taylor, a $1.2 billion company with 50 properties. The transaction proved complicated in that half the properties were fees and half were ground leases. Recognizing the office market was starting to get tight in New York, “we felt the residual value of Fifth Avenue was far in excess of what others were valuing it at,” said Neibart. There’s been opportunity for mixed use and residential around many of the stores, the locations in the northeast being highly desirable.

Richard Saltzman, president of Colony Capital, discussed Colony’s acquisition of Fairmont Hotels & Resorts, a $6 billion deal concerning 87 properties in North America. The company had previously bought Raffles and was contemplating a merger. In partnership with Kingdom Hotels they joint-ventured the deal to spread the risk and went about re-branding Kingdom Hotel assets as the Fairmont brand. “The advantage of debt markets,” said Saltzman, “is you can immediately de-risk the transaction, take the real estate in Fairmont and Raffles and sell with long-term management contracts. This is new in the hospitality space.” Alan Leventhal, founder, chairman and CEO of Beacon Capital Partners, spoke about just having sold several properties including the John Hancock Complex at 1211 Avenue of the Americas. The company didn’t have equity capital at the time so approached Lehman to get set up. “Value,” said Leventhal, is the discount to replacement costs, a healthy margin, and a reasonable prediction of replacement cost five years into the future. “It’s very expensive to replace these assets.”

The Zell/Lurie Spring Members’ Meeting will be Thursday and Friday, April 19 and 20, 2007 at the Rittenhouse Hotel.

Audio of the meeting is now available on-line. Please contact Ron Smith for more information.

Posted November 2006

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