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2011 Fall Members’ Meeting Summary

Zell/Lurie Research Sponsors kicked off the Fall Members’ Meeting with an exclusive event on Tuesday evening, October 11 at The Rittenhouse Hotel. An excellent meal preceded an enlightening and well-received presentation from Wharton finance professor and global financial expert Richard Marston, who focused on the crisis in Europe and the fall-out for America.

The following day, more than 350 members and their guests congregated in Houston Hall for the Fall Members’ Meeting. For many members and students, the day began at 8 a.m. with a mentor/mentee breakfast. This very popular and valuable program offers real estate students the opportunity to learn about the practical aspects of the industry from the high-experienced practitioners who make up our membership.

Robert Lieber, chairman of the Zell/Lurie Real Estate Center, opened Wednesday’s meeting in the University of Pennsylvania’s Hall of Flags in Houston Hall. Joseph Gyourko, the Center’s director, delivered his State of the Center address, noting that despite the difficult economic climate, the Center has acquired a record number of new members this Fall and is well-situated to continue remain the thought leader in real estate.

The first panel’s title was “Multifamily is Back, But is it Too Good to be True?,” which was almost immediately disputed by panelist David Neithercut, president and CEO of Equity Residential, who said he was not sure multifamily “really went anywhere.” As the largest owner/operator of multifamily dwellings in the country, with 135,000 units, his company sold assets in 2008 and 2009, and is not in an aggressive mode, but focused on higher density core urban markets, which he called a “good strategy.”

From panelist Christopher Hashioka’s viewpoint as president and CEO of Fairfield Residential Co., the market sector has seen a “remarkable recovery” with pretty positive fundamentals. With 48,000 units over 30 different markets, he says he has 30 percent A-quality and the balance at about a B. “There are a lot of events that could derail what’s going on, and we watch it carefully,” he said.

The third panelist, Chris Wheeler, partner in Triton Atlantic Partners, said he saw signs of a bubble and possible meltdown, and took everything private in 2006.

Moderator Asuka Nakahara wanted to know the rationale behind the resurgence. Neithercut answered as the other two men nodded their assent: “It’s supply and demand. We haven’t built anything for about six years, and we’re not seeing anything new in the absolute number of units beyond the D.C. market,” he said. Fewer consumers seem to be interested in buying/owning single-family homes today, and his company benefits from people not leaving their apartments to buy something. And he sees that trend continuing for a while. “I see multifamily space continuing to be strong in 2012 and for years to come.”

Hashioka agreed with him, adding that his company is developing and is actively looking for investors interested in building core assets at higher returns than they can buy in the market today.

The panelists agreed that the biggest difficulty in developing is in getting financing, and Wheeler predicted that the apartment market will be oversupplied in a few years because the banks will continue to give them money, even when they should stop. Hashioka agreed with him, but believes there is a window of three to four years, based on the supply/demand imbalance seen in the mid-to late ’90s.

Niche multifamily housing such as student or senior housing can be attractive; Hashioka said he is active in that arena, especially student housing. “It’s a big need, and they have to rent every year.” By choosing the right sites and being selective, he said, he’s seen returns in the 20s.

Nakahara closed by questioning the men how they mitigate the risk of another big setback. They concurred that there are no guarantees, but diversification in holdings is good advice, and Neithercut said “muddling along” is good for them, keeping supply down and keeping people out of single-family homes.

The day’s second panel posed the question: “Real Estate’s Position in the Broader Capital Markets: How Does the Sector Look?” Moderator Peter Linneman, emeritus professor of finance and business and public policy at Wharton, suggested inflation is probably rising, and said the country has not had 2 percent 10-year Treasuries for any sustained period of time. But David Kostin, chief U.S. Equity Strategist and Goldman Sachs & Co., challenged the premise that inflation is rising, saying, “No wage inflation, modest rises on oil prices, and rents up only a little don’t equate to dramatic inflation. Inflation isn’t the issue; trying to get unemployment down is.”

Panelist Richard Perry, CEO of Perry Capital, believes that the world has a lot of money with few attractive investment alternatives. People feel they can’t trust the ratings agencies any more after “something between fraud and massive deception” took place in 2008-2009. “So what do you do with your money? You buy Treasuries. Then you wake up in 2011 and find out that the U.S. isn’t AAA credit, and many other countries aren’t stable either. There are few places that are safe to go,” he said.

John Angelo, chief investment officer of Angelo, Gordon & Co., said he analyzes the beginning, middle, and end before he invests, to determine where the return will be good. He believes in diversification, including real estate in his portfolio.

But what do people really want as returns, Linneman asked. Are emerging markets or gold the places to be?”

People are reconsidering investing in the stock market, given its history of returns, Perry said. “Based on all the failures of the past five years, of unexpected big names, of household brands, of AAA bonds, of countries and companies, people’s expectations are, for the first time, starting to square with their risk profile,” he answered. And it’s critical to understand emerging markets, he added. It’s especially challenging to understand the equity contract and legal disputes outside of the United States. “You often don’t get what you’re entitled to, and it’s easy to get tied up with litigation.”

Gold and other metals don’t technically meet the definition of “investment,” but are seen as the perfect asset, Kostin said, adding it’s hard to predict the value of gold. Gold stocks aren’t golden because the stock should correlate to the underlying asset, but they’re not.”

The panel discussed oil prices and the shale phenomenon, agreeing there should be policies in place about energy products. And the growth in the emerging markets of China, India, and Brazil create a demand for oil and base products, putting oil prices higher.

Kostin reminded the audience that the leading edge of the Baby Boomers are retiring and beginning to live off their savings. They’re “disinvesting” since many of them can’t tolerate the volatility in the market.

And the European market? “Europe matters in terms of sticking together as a group … There are 17 nations and cultures who don’t get along. They don’t get what they have to do yet,” said Angelo. “And what is Germany going to do?” asked Perry. He suggested that country can continue to invest in the Euro and bail out Eurozone members, but that will be very expensive. The political elite may think that’s a good idea, but not the German people, according to polls, he added. But they’re deeply committed to the Euro.

Linneman closed by asking each man what he would do if he were in power and to predict what will happen between now and April that will surprise us all: Angelo said he would concentrate on tax reform and said Hillary Clinton will be the Democratic presidential nominee; Perry would balance the budget and predicted Israel and Saudi Arabia would become allies when they realize their common enemy is Iran; and Kostin would implement a VAT tax, and said the Chinese growth will be even stronger than expected.

After lunch, the day’s keynote speaker was Charles Plosser, president of the Federal Reserve Bank of Philadelphia, whose speech, “An Economic Outlook,” mirrored the day’s panels. He began with the caveat that his thoughts on the country’s economy and views on monetary policy were his opinions and did not necessarily reflect the views of the Federal Reserve Board or of his colleagues on the Federal Open Market Committee. (To read the text of his address, go to

Dr. Plosser’s speech centered on this uncertainty, reflecting the conversations in the day’s three panels. Forecasters have revised down their forecasts for overall growth for 2011, and he expects GDP growth to be less than 2 percent. He does anticipate a 3 percent growth in 2012.

He was reassuring, however, about the risk of a double-dip recession. Although growth is sluggish and uneven, he says many of his business contacts don’t see the precipitous declines than many in the media would suggest. Perhaps the greatest uncertainty-which does impact the United States, as well, in this global economy-is that around the outcome of financial events in Europe.

Dr. Plosser concluded his statements by predicting that the economic recovery will continue and gradually strengthen, with the prospects for jobs to improve commensurate with that recovery.

The day’s final panel was moderated by Joseph Gyourko and comprised of Thomas Arnold, head of Americas-Real Estate, Abu Dhabi Investment Authority; Michael Fascitelli, president and CEO of Vornado Realty Trust; Spencer Haber, CEO of H/2 Capital Partners; and Roy March, CEO of Eastdil Secured.

Gyourko asked the panelists to comment on their sectors relative to the overall economy. Haber said it is consistent now, but not six months ago, and the “enormous dislocation in real estate rates” reflects his view of the future. Fascitelli said that from the public equity side, things were going reasonably well, but were tracking behind. “The capital markets were ahead; the reality is they may be too far ahead now,” he said. “In general, everyone is down since July.”

Gyourko asked Haber what happened in the CMBS market. “There was an initial change in April/May and a big hit later in the summer,” Haber answered, noting that some marginal investors weren’t dedicated real estate investors, leading to the drop from February (the peak) to April and May. “From June through August, we had an adjustment to a different world,” he added. The panelists agreed that the CMBS market would be back in recognizable form, but with different pricing.

Fascitelli explained that financing rates in public markets are going down; the cost of issuing 10-year debt is higher now than it was in April. “On the asset side, we can finance at low leverage around 5 percent … The market is pretty much on top of each other. The real impact will be on secondary market.”

Arnold noted that the hardest aspect of his job is figuring out which type of project to build and where, figuring out where the right place is to allocate his capital. Not all are after core investments, he added. Some have been buying B-note mezzanine paper, “not what you’d normally think.” They’re not immune to the world situation, however, cautioned March, adding that in the last few months he’s seen them walk away from risky deals.

Gyourko’s final question was to ask the panelists to speculate on what issues people will have dealt with by the next conference, in April.

March believes that real estate is an attractive alternative and that people are trying to find some direction to pursue. “The risk is Washington meddling,” he added. Haber thinks the biggest risk is that an important financial institution will fail or there will be a run on the bank. Fascitelli’s predicted surprise would be that Washington would act responsibly before the election, and on the negative side, there would be a worse recession and a meltdown “that’s far worse than we think.” Arnold said there are questions raised around the world about the United States’ ability to deal with fiscal policy. On the positive side, investor confidence may improve, in spite of Washington not being able to address those issues. On the negative side, he said the cost of debt could spike, causing cap rates to go high.

Robert Lieber closed the meeting by inviting everyone to join the Spring Members’ Meeting on April 24 and 25, 2012, at The Rittenhouse Hotel in Philadelphia.

Posted November 2011

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