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2006 Spring Members’ Meeting Summary

An array of expert speakers and panelists addressed more than 450 participants on April 20 and 21 at the Zell/Lurie Spring Members’ Meeting held at the Rittenhouse Hotel, Philadelphia.

Before the Thursday night dinner at the Rittenhouse Hotel, 50 Research Sponsors and special guests enjoyed meeting privately with Wharton Professor Jeremy Siegel, who signed copies of his new book, The Future for Investors.

The featured speaker for the evening was Martin Feldstein, Professor of Economics at Harvard University and President of the National Bureau of Economic Research. He addressed “The Case for a Competitive Dollar,” his perspective on global changes and challenges, and how to have a stronger dollar without inflation.

On Friday morning, Michael Fascitelli, Vice 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, “Up or Down…Where are Capital Flows, Deal Flow, Cap Rates and Interest Rates Heading?,” explored the current real estate capital markets and where things are heading in the next few years. Stuart Rothenberg, Managing Director of Goldman, Sachs & Co., and head of the firm’s Real Estate Principal Investment Area, predicted there will be no “shock” but instead a shift. “Deals will be hard to find,” he said. “With rising interest rates, lenders are targeting spreads and looking for bigger and better deals.” He added that the infrastructure business, things like the New Jersey toll roads, new infrastructure in the Third World, and government privatization of bridges and tunnels, will be housed under real estate. William Green, Managing Director of Real Estate Capital Markets for Wachovia Securities Corporate and Investment Banking division, agreed there would be a lowered amount of deal flow, but pointed out, “We’ll be amazed how quickly comfortable companies will be investing in the global market, particularly Asia.” Regarding the global market, Lynn Thurber, CEO of LaSalle Investment Management, also predicted strong, cross-border capital flows into real estate. She envisions a revised definition of real estate investing that goes beyond the infrastructure of ports and transportation, extending into education and healthcare/hospitals.

Moderator Asuka Nakahara, Associate Director of the Zell-Lurie Real Estate Center, asked the panelists what they thought about cap rates going up. Stuart Rothenberg agreed with Hamid Moghadam, Chairman, CEO and Director of AMB Property Corp., that cap rates weren’t going up; there was so much capital available, the cap rates would stay compressed. William Green provided an alternative point of view, believing that cap rates are indeed going up. The panelists then discussed who the most aggressive capital providers are, essentially saying that there are different motivations for different assets, different product types and different regions-so the most aggressive provider is always different.

Dr. Amy Gutmann, President of the University of Pennsylvania, delivered the keynote address, speaking on “Engaging Locally and Globally: A Bold Vision for the University in the 21st Century,” focusing on the reciprocity between the University’s traditional mission of teaching and learning, and the local and global engagement that is central to Penn’s “bold vision for higher education in the 21st century.” She said the university has new responsibilities for applying the knowledge created and transmitted by Penn faculty and students.

The second panel session, led by Lynne Sagalyn, Wharton Professor of Real Estate Development and Planning, explored “Urban Redevelopment in the Post-Kelo Environment: The Uneasy Truce Between Economic Growth and Individual Property Rights.” Panelist Terry Pristin, a reporter for the New York Times, talked about how the media picked up on the case and thanks to the “masterful” PR power of the Institute for Justice (a property rights group that has made “eminent domain a cause celebre”), the coverage was sometimes “hysterical.” Douglas Durst, President of the Durst Organization in Manhattan, noted that real estate developers are not in a position to have the “well-funded and well-organized” PR campaigns that the Institute for Justice has; the real estate community has been slow to react to Kelo perhaps because so few of them are directly affected by condemnation.

Julia Vitullo-Martin, a Senior Fellow at the Manhattan Institute and Director of the Center for Rethinking Development, pointed out that eminent domain could be of good use if it’s for “filling in the teeth” (taking over vacant lots, which may be vacant because of estate problems or because of a delinquent owner, between homeowner lots).

But what about the “holdouts”? Do we view them as a menace to development? Jerold Kayden, a Professor of Urban Planning and Design at Harvard University, said we need to “learn to love this condition… It’s an absurd developer who thinks we need a tabula raza condition, or that the holdout is something to fear.”

Lunch was followed by the first afternoon session, “What’s Up with Land? The Future for Land Prices,” moderated by Associate Professor of Real Estate Todd Sinai. Victor MacFarlane, Managing Principal, MacFarlane Partners, noted that there’s a lot of undeveloped land available in the country, but not where people actually want to live. Panelists talked about limited supply and the need for a location’s natural resources to match up to land mass and use. The impact of land price growth patterns on the retail sector was also a topic. Thomas D’Alesandro, Senior Vice President of General Growth Properties, pointed out that more merchants associated with “suburban” are coming into urban zones. As growth in the suburbs is constrained, the inner city markets look more attractive.

Panelists agreed that land prices will continue to rise, particularly in the coastal areas of California and Florida. “The trick is to get in before the anti-growth restrictions are put in place,” said Jeff Barcy, Chief Executive Officer of Hearthstone. Professor Joe Gyourko noted that restrictions and natural constraints actually increase value (by “barriers to entry”); major developers have become skilled at dealing with them.

The final session of the day featured three “legends” of real estate: Benjamin Lambert, Chairman of Eastdil Secured, Albert Ratner, Co-chairman of the Board, Forest City Enterprises, and Melvin Simon, Chairman of the Board of Simon Property Group. Moderated by Professor Peter Linneman of The Wharton School, this discussion was one of the biggest draws of the day. The three men talked about their first jobs and how they got into the real estate business, reminiscing fondly and finding humor in their early mistakes.

Mel Simon declared that, for real estate, the “best training you can get is working as a salesman. Believe me—none of us had experience in the building business. None of us had finance experience, none of us are architects, but . . . I sold encyclopedias in the Army, I sold pots and pans, I did everything!”

They also spoke about the most influential people in their lives and careers, then went on to advise young Wharton graduates how to approach the next stage of their lives. Ratner emphasized, "Take the job that would give you the most opportunity, even if it’s the least paid." Ben Lambert agreed, "You may think you need to go for the hedge fund that’s real estate related, thinking that’s the fastest way to make a lot of money—but that’s not the right way to go." Ratner concluded, "Our businesses reflect our personalities. If you’re looking for a formula and you can’t find it in your own heart, you aren’t gonna find it."

The meeting ended with a reminder from Michael Fascitelli to save the date for the Fall Members’ Meeting, Thursday, November 2, 2006 on the campus of the University of Pennsylvania. Next year’s Spring Members’ Meeting will take place on Thursday and Friday, April 19 and 20, 2007.

Posted May 2006

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