Coverage of “2010″ Bisnow Breakfast Featuring David Rubenstein and Ben Jacobs

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Sponsors:
Walker & Dunlop
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Work Spaces, LLC
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OTJ Architects
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Ernst & Young
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Nixon Peabody
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Speakers:
David Rubenstein, Co-Founder – The Carlyle Group
“Mr. Rubenstein co-founded the firm in 1987. Carlyle now manages more than $89 billion in private equity, with 33 offices around the world.”

Ben Jacobs, Managing Member/Founder – JBG Holding Company
“Since co-founding JBG, Mr. Jacobs has had over 45 years of experience at the firm in the acquisition, development, ownership, and management of commercial, hospitality, retail, and residential real estate.”

William Walker, President & CEO – Walker & Dunlop, LLC
“Willy is President and Chief Executive Officer at Walker & Dunlop, LLC, a commercial real estate finance company. Walker & Dunlop is one of the largest apartment lenders in the United States with significant Fannie Mae, Freddie Mac and HUD origination and servicing expertise. He joined Walker & Dunlop in 2003 from TeleTech, a global business process outsourcing (BPO) company. At TeleTech, Walker held several senior management positions including president of the company’s European and Latin American divisions.”

Steve Fuller, Director – Center for Regional Analysis, George Mason University
“Professor Fuller serves as Professor of Public Policy and Regional Development as well as Director, Center for Regional Analysis, School of Public Policy for George Mason University. His Washington area research includes studies on the impacts of federal spending, the hospitality industry, international business, and technology on the Washington area economies.”

Herb Engert of E&Y started the event with a cursory overview of the current market conditions with positive news:

• Capital markets appear to be opening up.
• Two new IPO’s opened up in the Washington DC area over the past two weeks
• One in real estate space and one in federal contracting space
• Thinks we’ll see more of this over the next few months.
• Hearing from a lot of companies preparing for IPO, capital market, and mergers and acquisitions transactions.

Following his brief assessment, Engert introduced Steve Fuller of George Mason University’s Center for Regional Analysis.

Fuller’s economic overview:

• Recession officially began in December, 2007 and unofficially ended about five months ago.
• Most economic indicators are moving higher, but not all of them.
• Recovery will not be uniform, but very uneven.
• Believes we will see a slow period this year and next year until Q3, 2010.
• This was the deepest and longest recession since WWII.
• By the end of 2009, we will probably see a 2.5% decrease in GDP. In 1982, we saw a 2% decrease.
• This recession was probably 19 months long. The recession in 1982 was 16 months long.
• Today, inflation and mortgage rates are in much better shape than the 12% and 14%, respectfully, in 1982.
• We just set a record in mortgage rates at 4.71 for a 30-year fixed mortgage.
• Unemployment is still a huge issue.
• Q3 numbers are positive but a false signal because they are built around an inventory cycle and inventories are very low – especially manufacturing inventories.
• Stimulus activity inflates these numbers, too.
• Q4, 2009 could act very similar to the Q3, 2009.
• Most of 2010 will be a year of transition where the private sector and consumers start to become more active in the economy and the federal stimulus will begin to retreat.
• Q4, 2010 will be very telling.
• By Q4, 2010, we need at least a 2.8% growth rate to bring unemployment down below what it is today.
• Housing sales have picked up partly due to the tax credit for first-time homebuyers.
• Until we start building more homes, the economy will not recover.
• It took 27 months after the recession of 2001 for job growth to return to normal.
• Unemployment will peak in Q2, 2010.
• Unemployment rate for women: 7.9%
• Unemployment rate for men: 10.5%
• 70% of all unemployed workers are male.
• Consumer expectation is still low, but people are anxious.
• The Washington, DC area is down 27,000 jobs, on average, through 10/2009. We lost 51,000 jobs, net, in 1991, when the economy was much smaller.
• 6.2% unemployment rate in October, in Washington, DC.
• Top 5 job markets: Washington, DC, Minneapolis, Boston, Dallas, and Houston.

Following Fuller’s presentation, William Walker engaged David Rubenstein in a rapid-fire question and answer period. Walker asked the questions, and Rubenstein answered.

1. What will U.S. GDP growth look like in 2010?

• Certainly higher than 2009.
• General estimates will be 2.5% – 3% growth likely.
• GDP is an outdated statistic.
• Even though we’ll be out of the recession, we still will have enormous debt.
• The dollar is being challenged.
• We have severe economic problems that will take at least a generation to work through.

2. What are the chances of a double-dip recession?

• No one really knows.
• Most likely will not see a double-dip recession.
• The government has been so startled by what we’ve gone through, that they will pump enough money into the economy to avoid another recession.

3. Who is the second most influential politician in this town?

• Ben Bernanke has the greatest impact on the global economy.

4. If you could only invest in one country over the next ten years, which would it be?

• China will be the largest economy in the world by 2035.
• China is the new center of capitalism.
• You can’t invest too much money in China.
• After WWII, the US was 48% of the world’s entire GDP. Now we are 22%, and cutting down.

5. America’s top company used to be GE. Is it still, and if not, who is?

• GE’s overall market value has gone down, although they are still a strong company.
• Today, the most admired companies in the world are foreign companies.
• It takes about $7 today, to buy what you could buy for $1 in 1960.
• As the dollar goes down in value because of the deficit, foreign countries will be able to buy out many iconic American brands.
• We have a total of $58 trillion in debt.
• If the day Jesus was born, 2009 years ago, if a million dollars was put in a bank account on that day, and another million dollars was put into account on each subsequent day for another 2009 years, you still wouldn’t have $1 trillion.

6. What can the government do?

• We have to find a way to control spending.
• Create a commission to control/cut spending and increase taxes.
• Social Security benefits will have to be reduced.
• Defense spending is 85% of the federal budget and that won’t stop any time soon.
• Entitlement spending is the only way to cut benefits and the only way to do this is to cut benefits from people who have not collected them.

7. Are we in the best of times or the worst of times?

• We are the largest economy in the world and we will get through this.
• We have the best educational system, best R&D – best innovation, best legal system.
• We just have to recognize we are not the same economy we once were.
• Unemployment rate is more like 16.5%, not 10%.
• Lost 7.5 million jobs in this recession.
• 3 to 4 years before we get back to 5% – 6% unemployment.

8. Where does the American economy go?

• Energy, but not alternative energy. Alternative energy is too small, too expensive.
• Carbon energy is still a great sector and will still be with us for a long time. We won’t replace this within our lifetimes.
• Oil has a long way to go up – relatively cheap today.
• Health care – baby boomers will start to retire and require healthcare services.

9. Is BRIC (Brazil, Russia, India, and China) still a huge focus?

• Emerging markets is every country that is not the U.S., Western Europe, Canada, Australia and Japan.
• By 2014, the GDP of all of the “emerging markets” will have passed the “developed markets.”
• By far, the most attractive market is China.
• Second is Brazil, the 5th largest population in the world. Strong currency, strong natural resources. Brazil does not rely heavily on the export market.
• India would be the third most attractive.
• Russia is the most disappointing. Their economy is not diversified enough to become a major economic player.

10. Where is the opportunity to raise funds?

• Not a lot of money in from public pension funds.
• Outside the U.S. – Sovereign Wealth funds will be the biggest contributor to P/E funds.
• Sovereign Wealth funds are large pools of capital that are invested at the discretion of the government that don’t pay out benefits and so the money accumulates quickly.
• High net-worth people.

11. What’s your take on domestic real estate, specifically commercial real estate?

• What was your next question?
• Sub-prime mortgages default at 6 times the rate of prime mortgages.
• Commercial values in larger cities will go down 20% – 30% over the next 2 years.
• There is nothing worth buying today because these prices will come down.

12. Outside of the United States?

• Europe’s commercial real estate problems are ahead of ours.
• China is doing well in real estate, but is there a bubble coming?
• In Dubai, and other parts of the Middle East, the bubble is bursting.

13. Where are interest rates headed? Will we be able to get debt to finance transactions?

• As long as we’re in this type of economic period, we will not increase interest rates.
• Once we see signs of growth, we’ll see interest rates rise.

Following these questions, Maureen Dwyer, a partner at Pillsbury law firm, interviewed Ben Jacobs, Managing Member and Founder of JBG.

1. What has the past year been like?

• Gives us a lot of opportunities and will serve as the basis of years to come, especially generationally.
• There was gross oversupply which led to major shifts in real estate value.
• We maintain reactive to the markets, but we cannot predict them.
• We look to use tools to measure risk where we can.
• Circumstances today are far more fundamental, especially in commercial real estate.
• Immediate term of unsettled circumstances – this will continue even in the Washington area, particularly with the availability of debt.
• Vertical construction will become a smaller part of our work.
• Asset management will become a larger part of what we do.
• The lessons learned over the past few years will be recognized for years.

2. What can the government do?

• A lot if they are given the ability to do it.
• There is a lot of tension among the two-party system
• The wave has yet to hit the beach with maturing debt and the government will have to intervene on the “extend and pretend” theory – which is merely kicking the issues down the road.
• How will the government resolve all of the new, complicated, alternative investments with no history to rely on?

3. Has commercial real estate hit bottom?

• No, values have not hit bottom. But this leads us to remarkable opportunities for both success and failure.
• Prices are low, but could very well go lower.
• Supply is limited, but there are opportunities.

4. What areas will you be targeting in commercial real estate?

• We have not suffered nearly as bad as other real estate markets.
• We are not single family developers, but we continue to invest with developers who have expertise in this area.
• Supply has been reduced dramatically.
• We are looking forward to commencing construction in select areas of development for “for sale” housing – townhouse developments.
• There are still areas where people can look and see that the market is not ready to receive new condo buildings.

5. What about D.C. makes us such a strong market?

• The government is a main stay of our strength. There is no need to think that the federal government won’t continue to grow and grow dynamically.
• The Washington, D.C. market will remain strong and this will invite investors from other areas.

6. Do you see the whole “green” movement in real estate as an opportunity for the D.C. area?

• LEED development is very important.
• Mixed-use is where we develop because of their strong “metro-centric” tendencies.
• This has been a proven formula for success.
• “Metro-centric” refers to transportation-oriented development focus.

7. What can we do to get through this?

• The word patience comes to mind.
• Is still very enthusiastic about the business he is in.
• This has been a wake-up call for government jurisdictions who made things hard to develop even when it was in their best interest to do so.

8. What is your philosophy on life?

• In the first 1/3 of your life you learn. In the second 1/3 of your life you earn, and in the last 1/3 of your life you give.

What do you think?

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