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Real Estate Leaders Discuss Public/Private Dynamic

09/30/2010 | By Jason C. Flynn

Several leading real estate professionals gathered Sept. 30 at Georgetown University to review the state of the industry. At the second in the Real Estate Luminary Series sponsored by NAREIT and Georgetown's McDonough School of Business, conversation focused on the differences between publicly and privately held real estate and how both are performing in the current economic climate.

To view a webcast of the entire event, CLICK HERE.

Robert H. Steers, co-chairman and co-CEO of Cohen & Steers, kicked off the standing-room only event with some of his thoughts about conditions in the commercial real estate market. Steers spoke about the recent upheaval in all markets and how real estate had weathered the storm, even though the landscape had been altered drastically.

"While our financial system survived, we've seen dramatic upheaval in the real estate and real estate capital markets, which has really been a game changer," Steers said. 

One part of the event featured a conversation with industry pioneer Sam Zell, chairman of Equity Group Investments. Led by Steers and Steven Wechsler, NAREIT president and CEO, the conversation covered a range of topics, including Zell's views on the availability of capital in the real estate markets.

"I don't think there is a shortage of capital to be lent in the real estate space," Zell said. "As a matter of fact, I think there is actually a significant surplus of money that's available. I think the issue is that there is very little loan demand that justifies that capital."

Zell said the real issue is that there isn't enough equity in the market currently to support new or renewed loans. Amid all the discussion during the event about interest rates and other factors buoying or depressing the markets, Zell was adamant that no matter what else was going on in real estate, the core principles of supply and demand are still the most important factors.

"We have built nothing in this country since July 2007. It is unlikely that we are going to build anything else in the next two to three years," Zell said. "That means that this country, which is still growing, will literally have no new supply for the next five to eight years."

Zell said that the lack of supply in the institutional-grade real estate markets will cause all available space to fill in the next 18 months, although at lower rents.

In addition, the Real Estate Luminaries event featured a panel discussion moderated by Matthew Lustig, vice chairman of U.S. investment banking for Lazard Real Estate Partners. Joining him on the panel were Thomas Flexner, global head of real estate for Citigroup; Michael Fascitelli, president and CEO of Vornado Realty Trust (NYSE: VNO); Christopher Nassetta, president and CEO with Hilton Worldwide; and R. Scot Sellers, CEO of Archstone.

Fascitelli spoke about the slow pace of deals that are occurring in the market, explaining that only the most stable assets with dependable cash flow and yield are moving currently. 

"We haven't quite seen the level of re-working when it comes to these assets that we believed we would," Fascitelli said.

Both Fascitelli and Nasetta pointed out that many of the small and medium sized banks are holding on to a significant number of distressed real estate assets, contributing to the sluggish pace of the markets.

"One of the biggest questions I have is how quickly do we recover from this crisis from a banking system point of view, when we still have a system that is very clearly clogged," Nasetta said.

For companies in the private sector, recent market conditions have made it difficult to make deals or acquire properties, Sellers said.

"As a private company, we spent the early part of 2009 running around trying to raise capital, and there wasn't an institution that we spoke to that had any kind of interest whatsoever in providing money to a private company who wanted to go buy apartment buildings," said Sellers.

Flexner said investors of all types are shying away from risk, he said, but real estate is still drawing attention from investors.

"With all the concern about the unemployment rate and the chances of a 'double dip' recession," Flexner said, "real estate has become the 'least worst' investment risk."

Flexner maintained that, because so many investors are wary of illiquidity, investments such as listed REITs are drawing greater attention.

Lustig summed up many of the ideas and concerns addressed during the discussion.

"We've passed through an incredible cycle in our business," Lustig said. "We sit with a reasonably well-restored public market and a very disparate situation in the private market. The private real estate market is still recovering from a heavy wave of restructuring."