What the Global Leaders Had to Say at the NYSE Wharton Conference

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This past weekend, some of the biggest names in real estate discussed the market outlook at the “Road to Recovery” event held at the New York Stock Exchange. I wasn’t able to attend, however I want to thank Jean-Claude Goldenstein of CREOpoint who nicely summed up the event. He has once again provided an insightful and thorough look into the conference with behind the scenes quotes from some of the most successful people in the business. Check out his coverage of the ULI Fall Meeting and REITWorld.

“Our greatest strength in the US is our optimism and our greatest weakness is our memory. In a year, Tiger Woods will be a hero again!”

- Barry Sternlicht, CEO Starwood Capital Group

Sam Zell, Bob Toll, Jackson Hsieh and Barry Sternlicht on the U.S. market

Billionaire investor Sam Zell in a discussion with economist Dr. Peter Linneman:

“It will take us three to four years to get us back those 7.2 million U.S. jobs. Yet, CRE will not have to wait as long because of constrained supply. Ultimately, real estate is all about supply and demand. There has been no new significant development started since July 07 and it is very unlikely anything new will be built over the next 24 to 36 months. Vacant space will re-lease at 30% lower prices and I expect more sales and new investment before 2013”

“We are buying debt as a way to gain control of underlying real estate but are finding banks are still reluctant to absorb losses and sell real estate loans. There will be plenty of opportunities because more than half of all U.S. institutional real estate was sold from 2000 to 2007, and the debt balances exceed the value of the properties today. Everyone that bought during that period is underwater.”

“Returns in the 20’s are always achievable when you raise money!”

When I asked him what was his biggest surprise in the last couple years he replied “Lehman Brothers.” Peter Linneman added that he had been surprised by “how government officials openly panicked.”

Bob Toll (Toll Brothers CEO): “A year ago I was so scared, anyone who wanted to spend a dollar would get fired on the spot. Now everyday we are bidding on something somewhere”

Jackson Hsieh (Global Head – Real Estate, Lodging & Leisure, UBS) was also at the event. He had earlier been interviewed: “Government programs like PPIP and TALF were good, in concept, to re-start the secondary securitization market. However, they have not taken off because property values have fallen so far that banks cannot refinance previous loans made at higher asset values unless property owners put in additional equity — which most are not in a position to do.”

Barry Sternlicht (Starwood CEO):

“I’m not at all bullish…on the U.S. We’re in serious trouble. The “trillion dollars of steroids” of government money running through the system means inflation will soar to levels not seen since the 1970s”

“I worry that the FASB and the Fed are adding to the problem by relaxing write down rules and keeping interest rates too low”

“In October we bought a $4.5 billion Corus Bankshares portfolio from the FDIC with the support of the government. It will take four years for U.S. taxpayers to see returns on their share of the investment”

In summary, high unemployment, an essentially bankrupt regional banking system, restrictive lending requirements, investor skittishness and the wearing off of the stimulus continue to be strong barriers to a robust U.S. recovery. Bruce Upbin (Forbes Managing Editor) concluded: “People keep talking about CRE as the next shoe to drop, I wonder how many legs there are to that body…”

Opportunities outside the U.S.

Jeff Alpaugh (Global RE Practice Leader Marsh) candidly said that top American dealmakers he was working with were not bullish on the U.S. and some were looking elsewhere. An emerging markets panel suggested that country selection factors were: diversification of circumstances, scale, demographics, partner quality, rule of law, access to information, capital inefficiency, connectivity and depth of talent. For example Aniruddha Joshi of Hirco noted that some Indian people working in Dubai were coming back to India. Regarding partner selection, Fred Cooper (SVP International Development, Finance and Investor Relations at Toll Brothers) laughed that he met “a guy in Dubai who told me he had figured out a way to only build penthouses!”

Jeff Schwartz (CEO Global Logistics Properties, who I had a chance to consult for in India when he was CEO of Prologis) is now focusing on companies who distribute internally within China (e.g., Nike’s 1.5 million sf distribution center) rather than those more dependent on trade. He saw much higher increased leasing velocity now compared to the beginning of the year. He also sees asset acquisition opportunities in Japan in 2010 as a sharp fall in the country’s land prices is seen creating attractive deals.

Having a good time afterwards with Jeff Schwartz (CEO Global Logistics Properties)
and Jeff Alpaugh (Leader of Marsh Global RE Practice)

Sam Zell said that “Japan and Western Europe were demographically challenged and expensive since the banks prefer to wait rather than take bids.” Through his private-equity investment arm Equity International, he has invested aggressively abroad, particularly in Brazil and Mexico and he is looking at countries whose populations are big enough to promise growth. “There’s’ no question that China is going to grow and there’s no question there is going to be demand,” he said. “Whether or not an outsider can benefit from growing demand is becoming more questionable every day given uncertainty over corporate governance and treatment of foreign investors.”

Other Takeaways

Sam Zell also said that “newspapers are like melting ice cubes where the only thing you can do is keep the room cold and take radical measures.” He noted the competition from the growing blogosphere and added that the free news model was not sustainable. I also had interesting conversations about the future of their business with Carol Massar (Anchor, Bloomberg TV), Dennis Kneale (Anchor, Power Lunch, CNBC), Bruce Upbin (Managing Editor, Forbes) and Ignatius Chithelen (Managing Partner, Banyan Tree Capital Management).

Ignatius thought we should anticipate which industries will be disrupted by Web 2.0, like the press was due to Web 1.0. Carol, Dennis and Bruce see the need for more engaged audiences and were optimistic about the growth of industry-focused online networks. Even Sam Zell, who I introduced to the idea of CREOpoint professional network last year, kindly said that he thought CREOpoint was “interesting.” Stay tuned… By the way RICS, the largest CRE association in the world, commissioned a groundbreaking report on the role of social media in property (click on the link if interested in an advance copy of the report written by our own CREOpoint members Andrew Waller and Bob Thompson).

What do you think?