Mastering the metropolis through research and thought leadership.

2008 Spring Members’ Meeting Summary

An array of expert speakers and panelists addressed more than 500 guests at this year’s Zell/Lurie Real Estate Center Spring Members’ Meeting held at the Rittenhouse Hotel, Philadelphia on Tuesday and Wednesday, April 29-30. On Tuesday evening attendees recognized students and faculty who were this year’s award recipients. Following a superb dinner, Robert E. Rubin, Chairman of the Executive Committee of Citi and 70th Secretary of the United States Treasury, gave a fascinating talk on the outlook and challenges facing the U.S. economy.

Mike Fascitelli, Zell/Lurie Advisory Board chairman and president of Vornado Realty Trust, launched the Wednesday morning program. Center Director Joe Gyourko welcomed the meeting participants and thanked Sam Zell on the tenth anniversary of his endowment of the Zell/Lurie Real Estate Center. Thomas S. Robertson, Dean of Wharton addressed Samuel Zell and recognized him as a legend of the real estate industry, adding that because of his gift, “Wharton is a major player in real estate.” Robertson said that over the last decade, the Center has been involved in cutting-edge research and education for students, building close relationships with the real estate community, and helping develop Wharton as a worldwide brand in real estate. “We are very proud to have Sam’s name on the Center and we think the Center is testament to his vision. We’ve learned so much from his expertise and his relationships over the past ten years,” said the Dean.

Zell spoke of his appreciation and shared his enthusiasm and dedication to the Center. “My only objective was to use some of my good fortune in a way that would take a program that was quite a bit ahead of academia and accelerate it to truly become, without question, the best. No one has anything more valuable than their name and it’s with great pride that I lend my name to this organization.”

Zell then joined Peter Linneman, Sussman Professor of Real Estate and Finance, in a lively discussion about the current state of the real estate industry, which featured a few topics that would resurface in each of the day’s panels.

Perhaps one of the most popular themes was the issue of confidence, or the lack thereof, among investors and consumers in the wake of the housing and subprime mortgage crisis. Zell best illustrated the nation’s waning confidence levels with a short animated video that he created in late 2007 for clients and colleagues. “Confusion: Based on a True Story,” featured a catchy song about the subprime crisis and the credit confusion that has resulted in its aftermath and garnered chuckles and applause from the audience.

In the panel, “Is the Bloom off Real Estate? The View from the Broader Asset Markets,” Joe Gyourko led a discussion about the state of the capital markets. Dan Stern, co-founder and CEO of Reservoir Capital Group, feels the real values can be found in senior securities for the short term. “I’m positive on the investment landscape, but it’s hard to predict the extent to which housing prices will harm consumers. It’s impossible to know, but the opportunities are plentiful,” he said. Gus Sauter, managing director and CIO of The Vanguard Group, agreed with Stern, adding that his firm is looking for Treasury yields to go back up and for continued improvement in credit spreads. Ron Pressman, president and CEO of GE Real Estate, reiterated Zell’s earlier point that the economy is facing a confidence crisis. “No one is coming to bail out the economy. Somewhere we need to rally confidence—maybe it’s right here in this room. . . What’s most important to get back on track is for the Treasury and the Fed, who have done a lot, to take some shots at symbolically restoring confidence to trading markets.”

The keynote speaker, Wesley Edens, chairman and CEO of Fortress Investment Group, LLC, offered that the current credit crunch creates significant opportunity during “the great deleveraging event of our lifetime,” which “has significant implications for many things that rely on leverage, with real estate being very high on that list.” He went on, “Unquestionably the greatest opportunities are on the asset side. The deleveraging that will happen will result in new assets being sold and more people buying them, and generally that’s good for asset prices in terms of bringing them down from an investment standpoint.” He believes there has to be a resumption of credit and that a recovery of assets will help that happen. As to whether the Fed should take action in the present crisis, he said, “I’d rather spend a few dollars to bail out some homeowners than spend a lot more money to bail out a banking system.”

The panelists of the third session, “The Return to Fundamentals: How Will Money Be Made in the New Environment?,” moderated by Asuka Nakahara, considered what companies need to do differently in the likelihood of a much more unforgiving market. Jay Sugarman, chairman and CEO of iStar Financial, spoke from the lender’s perspective stating that the past three years have not been about making smart investments, but making smart leverage decisions. Jeffrey Schwartz, CEO of ProLogis, agreed there needs to be a return to fundamentals in order to make money today. “It’s all about value creation,” he said. Robert Taubman, chairman, president, and CEO of Taubman Centers, indicated that what his firm is doing today is no different from what it did in the past or will do in the years ahead. “A return to fundamentals? We never really left,” he noted. Echoing other panelists throughout the day, his firm is also taking a global position, focusing on building assets in Asia. On the other side, Todd Platt, CEO of Hillwood Investments, is now taking a domestic approach. “Now is the greatest time to buy property in the U.S.,” he explained, “Sixty percent of our business is development, but in terms of how we are looking to make money going forward, we hope that close to 90 percent of our business is investments.”

The final panel, led by Mike Fascitelli, considered “A Look into the Future for Real Estate.” Tom Flexner, former vice chairman of Bear Stearns and now the global head of real estate for Citi Institutional Clients Group, spoke about the current state of uncertainty and admitted he is much more pessimistic than most of the previous panelists. “We don’t know when true liquidity will return to the market; I happen to think it’s a much more structural impediment than an issue of returning to confidence.” Barry Sternlicht, chairman and CEO of Starwood Capital Group, echoed Flexner’s views calling this a “rolling crisis” that will take three or four years to work itself out in the United States. Richard Saltzman, president of Colony Capital, brought a slightly more optimistic viewpoint to the conversation indicating that, although there is more confusion and less capital, “I think that for some investors, this is a much better environment to differentiate yourself in terms of how you buy and structure and what you really do with the asset.” Part of the confusion, as Sternlicht points out, lies in no one knowing what anything is worth right now. Saltzman suggested that the Fed could create some kind of program to put a floor under housing prices and that would go a long way toward curbing the downside of the economic cycle. Flexner agreed, adding that in order to stabilize housing, the Fed needs to encourage new owners to step up and buy through instruments like investment tax credits. “If they don’t get a floor on housing, then all bets are off on the rest of the consumer economy,” he stated. Sternlicht added that the Fed has to find a way to bring mortgage rates down in order to stimulate any new activity.

Mike Fascitelli ended the day by thanking everyone for engaging in such compelling discussions and recalled his prediction at last year’s Fall Meeting that conditions would grow worse by spring. However, he concluded with the hope that conditions would improve by the next meeting, Friday, October 24 on the University of Pennsylvania campus.

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

Posted May 2008

In This Section