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2007 Spring Members’ Meeting Summary

An array of expert speakers and panelists addressed more than 450 members and special guests on April 19 and 20 at the Zell/Lurie Spring Members’ Meeting at the Rittenhouse Hotel, Philadelphia.

Before the Thursday night dinner 50 Research Sponsors and special guests enjoyed a private colloquium and cocktails with the evening’s featured speaker, David Gergen, Gergen is professor of public service at the John F. Kennedy School of Government, director of Harvard University’s Center for Public Leadership and an editor-at-large for U.S. News & World Report. At dinner, Gergen gave a fascinating and thought-provoking talk on “American Leadership in the 21st Century.”

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

The first panel, “What Does the Economy Hold for Real Estate and Other Investment Markets?” explored the anticipated direction of the capital markets—into which real estate investing is now well-integrated—over the next couple of years. As moderator, Center Director Joe Gyourko opened the session with the observation, “We’ve had a wonderful ride. How can the economy keep growing without a recession?” With consumer spending, responded Mark Zandi, chief economist and co-founder of Moody’s The expansion is winding down, he said, and residential real estate is so overbuilt that prices will have to continue falling until excess inventory is absorbed.

On the other hand, 85 percent of consumer spending is for durable goods and 16 percent—a larger share than residential construction—is in health care. (Likelihood of recession: 30 percent, said Zandi.) Allen Sinai, chief global economist and president, Decision Economics, pointed out that—except for “problem” companies such as Ford and General Motors—corporate profits have doubled over the past five years. “The global economy is in fantastic shape,” he said. “It’s hard to see businesses pulling back to any significant degree seeing how well they are doing.” Commercial real estate is also strong, said Sinai, who predicted 15 to 20 percent growth over the coming five years. (Likelihood of recession: 25 percent, said Sinai.) Peter Linneman, the Sussman Professor of Real Estate and Finance at Wharton, forecast another two years of economic growth, unfettered by government intervention. “Politicians can do nothing right now,” he said. “They are totally captured by the war. That means they’re leaving (the real estate industry) alone.” After that, he said, be careful: “There will be a pause after the (2008) election,” said Linneman, and maybe more. Pro-formas never include recessions, but they always come.

All three agreed that the primary obstacle to further growth in residential real estate is excess inventory—about a million units, according to Zandi. Demand is down and first-mortgage foreclosures up to about 900,000 in 2006. Sinai anticipated price declines of 5 to 10 percent.

The second panel, “Sustainable and Green Development: Meeting the Future Today,” considered the design, marketing and financing of environmentally conscious real estate assets. Lynne Sagalyn, Wharton’s professor of real estate development and planning, introduced the “green” phenomenon as “an interesting convergence of interest and action by…passionate citizens and dedicated professionals from a wide variety of fields, local government and business.” What, she asked, is it about? Design, said Rafael Pelli, a principal with Pelli Clarke Pelli Architects, New Haven, Conn., whose firm designed the Gold-LEED “Solaire,” Manhattan’s first green high-rise apartment building. According to Pelli, “green” requires ground-up thinking that emphasizes the process as much as the final product because LEED standards demand reduced construction waste. Solaire, he noted, features photovoltaic panels incorporated in the body of the structure—not merely stuck on the roof—and a fresh-air exchange system that allows it to breathe in the absence of leaky windows. Marketing, said George Aridas, senior vice president of the Albanese Organization, New York, which developed Solaire. “Green,” he said, includes a variety of techniques—not all of which are appropriate for every building. “There is a spectrum that goes from efficiency to indoor air quality,” he said. “You consider to whom you’re going to market and make it a part of your entire business strategy.” Indoor air quality is a top concern in Manhattan, so Solaire’s centrally filtered fresh air is a strong competitive advantage. Social policy, said William Browning, founder of Browning + Bannon LLC, Washington, D.C., a research and consulting firm that tracks “green” renovations of existing buildings. “Climate change will be seen as a national security issue,” he said. “There will be pressure to push energy efficiency to extreme levels.” Expect zero-energy buildings that produce more than they consume. Buildings now produce 40 percent of CO2 emissions and present a “huge” opportunity for renovation, particularly if driven by legislation. Government support, said Mark Maloney, former director of the Boston Redevelopment Authority. In Boston, he said, unions were brought onto a local task force and are now training people to repair photovoltaic units; the fire department is considering modifying policies that discouraged rooftop turbines.

Just before lunch, keynote speaker Dennis Ross, counselor and Ziegler Distinguished Fellow at the Washington Institute for Near East Policy, pondered “Contending with Challenges from the Middle East.” A disappointed early supporter of the Iraq war, Ross now sees three options: (1) Make the current surge work for long enough that the Maliki government forges a political solution, (2) a “soft” partition which would require Iraqis to think differently about the meaning of their country or (3) containment of the civil war by moving U.S. troops to Iraq’s borders and allowing them to fight it out. He does not favor a quick pullout. “Setting a date for withdrawal encourages the different sides to build up their militias” for a subsequent—and, possibly, genocidal—brawl, he said. “Our presence keeps the lid on.” Unfortunately, the Maliki government has not kept its promises to share oil revenues, reverse de-Baathification, improve security, share reconstruction money or create a fair process to revise the constitution. One bright spot is that Iraq’s neighbors do not want a civil war and might cooperate in its resolution if approached.

In the afternoon, four panelists considered "Mixed Use/High Density Development: Niche or the Wave of the Future?" and seemed to conclude that it meant one of two things: “city” or highly tailored niche project. “What we’re really doing is going back to an old idea,” said Witold Rybczynski, Meyerson Professor of Urbanism at the University of Pennsylvania. “Density comes back to the original context for mixed use which was ‘downtown.'” Outside of city centers, he said, low density can allow some mixed-use projects to work because people can move from one to another by car. But such projects require components that are carefully chosen in the context of their surroundings. Timing is crucial, according to Richard F. Tomlinson III, a partner with Skidmore, Owings & Merrill Architects. “The complexity of financing generates a lot of time upfront,” said Tomlinson. “To execute these things, it sometimes takes a market cycle.”

And projects can change: An SOM project in Chicago, Trump Tower, started as condos and offices, but could end up with apartments and hotel space as local demand fluctuates. Intra-project dynamics are often not appreciated, according to Jeff T. Blau, president, The Related Companies, developer and manager of the Time-Warner Center. “Every time you change something in the hotel, it does something to the retail,” he said. “Nobody is wearing one hat.” In the redevelopment of New York’s Pennsylvania Station—a Related project—a leading factor is transit; i.e., the trains that will funnel thousands of people a day through the facility. In many cases, the mixed-use concept is overhyped and misunderstood, claimed Kenneth P. Wong, president, Westfield LLC. “It’s often used as a panacea for excess land,” he said. “Sometimes you get the impression that municipalities really want a smaller version of the Time Warner Center,” even when such a concept won’t work in a particular location.

Unquestionably one of the day’s highlights was the conversation with Sam Zell and Jonathan Gray. They both contemplated the changing nature of the real estate industry and predicted that it would be…fine. The industry is more ethical than it once was and is, therefore, now the beneficiary of more investment, much now raised globally, not just within the United States. “We have to understand that we’re not in this very narrow niche business called real estate,” said Zell, chairman, Equity Group Investments. “Our success or failure is very dependent on macroeconomics.” That, in turn, means more opportunities in foreign markets, but the opportunities are different from what Americans are used to. “I’ve built 50,000 houses in Mexico, which has a deficit of four million units,” said Zell. “(Developers) are dealing in markets where the pent-up demand is enormous.” (In Brazil, he said, half of the units in his first low-cost development sold in four days, at 30 percent margins.) Europe, in contrast, offers almost no growth, said Gray, senior managing director and co-head of the Blackstone Group’s real estate group. “The upside is a very liquid, transparent market,” said Gray. “We’ve been able to invest capital and find situations that are interesting.” Many assets, he explained, are not managed to maximize value so, even without growth, effective management can make a difference. According to Gray, money moves across borders much more easily than it once did and its managers are seeking growth. “Some countries require people to save (for retirement),” he said, “and that money is invested.” In the developing world, said Zell, investment vehicles are even now being invented. “Investing in shopping centers in Brazil didn’t use to be easy,” he said. “Now, there are several public companies.”

The meeting ended with a reminder from Michael Fascitelli to save the date for the autumn members’ meeting, which will be Friday, Oct. 19, 2007, on the campus of the University of Pennsylvania. Next year’s Spring Meeting will take place on Tuesday, April 29 and Wednesday, April 30, 2008.

If you would like to listen to a webcast of the meeting, please contact Ron Smith for more information.

Posted May 2007

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