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2007 Fall Members’ Meeting Summary

The annual Fall Members’ Meeting began this year with an elegant dinner for 60 Research Sponsors and guests at The Rittenhouse Hotel on the evening of Thursday, October 18. Peter Linneman and Joe Gyourko led a spirited and timely roundtable discussion on “Pricing in the Housing and Commercial Property Markets,” drawing upon the expertise of both Wharton Real Estate faculty and Research Sponsors

Jon M. Huntsman on the University of Pennsylvania campus was the venue for Friday’s Fall Member’s Meeting. Members who enrolled in our Career Mentor Program joined their mentees for breakfast. The program provides a unique opportunity for students to acquire insights 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.

Joseph Gyourko, the Martin Bucksbaum Professor of Real Estate and director of the Zell/Lurie Real Estate Center, opened the session by noting that the state of the center was “really quite good.” Membership is steady, with 62 Research Sponsors and 167 Sustaining Members. Demand is strong for all courses, and 31 papers have been published in the Center’s series of Working Papers, available online at According to Gyourko, the Center’s top goals remain to provide “thought leadership” for the professional real estate community; encourage partnership among professionals, faculty and students; and make the Center a forum by promoting research and making it accessible.

Noting the passing in August of philanthropist Sheldon Seevak—a past chairman of the Center’s Advisory Board and its Executive Committee and a generous benefactor of the Center—Peter Linneman, the Sussman Professor of Real Estate and Finance at Wharton, said, “He was a mentor to me as well as many other people…I learned a tremendous amount from him about how to interface with the industry and how to build a program.” Rather than a moment of silence, Seevak was recognized with a round of applause.

The first panel, “Real Estate and the Public-Private Divide: Where Are We Going?”, moderated by Asuka Nakahara, associate director of the Zell/Lurie Real Estate Center, explored the impact of tightened lending standards on development. All participants agreed that the real estate downturn had made financing harder for public companies to obtain, although they also thought such companies were stronger competitors over the long term. Jay Mantz, managing director of Morgan Stanley Real Estate—with investments totaling about $90 billion worldwide—predicted that “conforming” credit policies would mean less ability to assemble financing packages and thus would “take the steam out” of the market for the coming four or five months. “Companies have gone private because of the cost of capital,” said Mantz. Still, public companies have a competitive advantage, said David Simon, chairman and CEO of the Simon Property Group, an S&P 500 company, which owns 378 commercial properties in Europe, Asia and North America. CEOs who are “prepared to take the heat” during quarterly fluctuations usually prefer this to the need of private companies to constantly manage their boards.

Predicting that some public companies would consolidate and others would go private, Simon thought that being a public company had been an advantage for his organization. “At the end of 2001, we bought Rodamco (for $1.6 billion) and I don’t think a private company could have done that,” he said. According to James Corl, CIO for Cohen and Steers, an investment firm specializing in REIT mutual funds, going private is usually a sign of either a failed business strategy or a CEO who decided that he or she could personally make more money in the private market. “If you have a real company and a business plan that promises growth,” said Corl, “you’ll make money in the public markets.” Richard S. Ziman, chairman of American Value Partners in Los Angeles, had mixed feelings about running a public company. On the one hand, he doubted that the company he took public in 1996—which grew from an initial market capitalization of $500 million and 4 million square feet of space to $3 billion and 12 million square feet—could have succeeded without public financing. On the other hand, said Ziman, the imperative to maximize shareholder value often ignores important issues; when cap rates fell, for instance, his company’s stock price didn’t move at all. Asia is an exception to the shift toward private capital, said Mantz, noting its “huge” effort to go public. “It’s the exact opposite of here,” he said. “There, investors will pay for future earning potential. They think the growth will be there.” Simon was skeptical: “I’m convinced that there is oversupply in China,” he said. “I’m curious about whether any of these developments have cash flow.”

The second panel, “Global Investing: Is This the Next ‘New New Thing’ for Real Estate?” moderated by Joe Gyourko, considered the wisdom of and best strategies for foreign real estate investment. Overall, panelists approached off-shore projects with caution, despite investor enthusiasm. “Five years ago, there were almost no global (real estate) players,” said Michael Pralle, president and COO of J.E. Robert Companies. “Now, there are many big investors in the United States and Europe who want more exposure to global markets.” Complicating that desire, however, is a lack of means to evaluate risk and returns that often don’t reflect risk. “Yields on (international) shopping centers all came in about the same,” said Pralle, even though the development risk varied. REITS are the answer for some institutional investors, according to James E. Rehlaender, portfolio manager for European Investors. “They’re breaking apart portfolios and looking at real estate separately,” he said, noting that REITs appeal to large U.S. pension funds looking for easy asset allocation. Skeptics included Dean S. Adler, president of Lubert-Adler Management, who said his firm has a long-term international growth strategy; it has a small presence in European shopping centers and resorts in the Maldives, primarily to introduce the company to those markets. But, he said, global expansion is not a strategy for short-term gain. “Do you have a competitive edge and can you transfer it to these other markets?” he asked. “If not, I don’t understand how you can invest.” Rather than expand into markets they don’t understand, said Adler, U.S. companies are better off looking for stateside opportunities-distressed properties, for instance. That sentiment was echoed by Bernd Knobloch, CEO of Eurohypo AG, Germany’s 10th-largest bank, who noted that both Europeans and Americans tend to miss opportunities in their own countries. “Entering a (foreign) market takes more time and human resources,” he said, “and we only do it if we have the right guy” on the ground in that market. Currently in 28 countries, Eurohypo plans to enter China in two or three years-after it has developed a local team. Note: Expect to pay Western rates for local expertise. “We’re currently looking in Brazil,” said Pralle, “and have heard of other companies trying to hire (talent) for what they pay factory workers.”

In the afternoon’s Farash Distinguished Lecture, Thomas S. Robertson, the newly appointed dean of the Wharton School and Reliance Professor of Management and Private Enterprise, defended business schools as a “force for good” in the world. Half of the world’s 6.6 billion people, he noted, live on less than $2 per day—a situation that business schools are uniquely positioned to help change. “Some people believe that one of the biggest problems is maldistribution of wealth,” said Robertson, “which leads to conflict and lack of opportunities.” Business schools such as Wharton create research that often precedes charitable donations of capital for small-business startups that can solve such problems. A Zambian feed-plant project, for instance, used Penn Veterinary School research to create the optimal mix of chicken feed from local ingredients and now produces 350 tons of feed a month. The project is led by Wharton professor Ian MacMillan. “This has resulted in an increase of 280,000 pounds of poultry and a dramatic improvement in health and nutrition,” said Robertson, who was previously dean of Emory University’s Goizueta Business School. Robertson dismissed as outdated the late 1950s criticisms of the Ford and Carnegie foundations that business schools attracted low-caliber students and were merely “descriptive” in their teaching. Now, he said, the situation is reversed: incoming Wharton students, at least, have higher GPAs and scientific method encourages knowledge creation, not just transmittal. Robertson acknowledged some validity to the newer criticism that elite MBA schools have become a sort of “credentialing” service. “Is that bad?” he asked. “And is it the fault of business schools, the students who come in knowing exactly what they want to do or the companies that hire them?” Robertson also took a shot at published college rankings, which-though they have been kind to Wharton—contribute to an environment in which students are “coddled as customers” and expect to be provided with high-paying jobs.

Rounding out the program, a lender and two borrowers all commiserated over the state of the capital markets in the panel, “Tightening Capital Market Conditions: Are They for Real and How Will They Affect Investment and Operations?,” moderated by Peter Linneman. Capital is more expensive, terms are more demanding and highly leveraged deals aren’t happening at all. And that will last a while. “Think about CMBS (commercial mortgage-backed securities) volume,” said Mark Weiss, managing director of the J.E. Robert Companies. “This year it will be $225 billion. “Next year, if we get to $100 billion, I think people would be happy with that number.” Like homebuyers with adjustable rate mortgages, said Weiss, those hurting worst are developers who banked on rising values. Weiss described a West Coast office developer who was forced to underwrite its project based on current record rents and presuming 7 percent growth for the coming four years. In 2011, when those rents are due to rise, that company will be required to get full-market rates and have 100 percent occupancy just to meet its debt service of 1.05 above treasuries. “That was how bad the credit curve had gotten and it has completely shifted,” he said. “Now, people are sometimes taking haircuts to inflate current cash flows.” Volatility is “incredible,” said Mark Finerman, managing director of RBS Greenwich Capital Markets. “I don’t think all the banks took their write-offs and (yet) the write-offs were substantial,” he said. “And the market is figuring out that Wall Street hasn’t been completely upfront about what it lost.” That, plus political developments, may be causing growing fear in the markets, said Weiss. “We saw oil spiking to $88 and what was going on in Turkey and Iraq,” he said, “and there was just world-wide fear, which led to fluctuations in the market.” And, yet, the real impact of fear has not taken hold.

There is little distressed selling, noted Weiss, though some banks are beginning to offer financing. “The banks have a huge backlog,” he said, “but they’re not distressed yet.” Similarly, many owners are holding on in the hope that the values of their properties will return to their highs of six months or a year ago. Eventually, tighter lending standards will affect the pricing of assets and equity, said Mike Fascitelli, president of Vornado Realty Trust. “How can’t this affect pricing?” he asked. “When you have debt costs rising and lower leverage… how can it not affect pricing?” According to Fascitelli, now is too early to identify opportunities. “We haven’t seen great opportunities on the asset side,” he said, “and paper side also has not been attractive enough to act.” The volume of activity, he predicted, will go way down and that decline is still all in the future.

The meeting ended with a reminder from Fascitelli, chairman of the Zell/Lurie Advisory Board, to save the date for the Spring Members’ Meeting, Tuesday and Wednesday, April 29-30, 2008, at the Rittenhouse Hotel, 210 West Rittenhouse Square, Philadelphia.

Posted November 2007

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