I’ve recently returned from the 2014 annual Spring Meeting of the Zell-Lurie Real Estate Center at the Wharton School. This year’s meeting included presentations by Jonathan Gray, Global Head of Real Estate for Blackstone; Howard Marks, Chairman of Oaktree Capital Management; John Angelo, CEO of Angelo Gordon; Dean Adler, CEO of Lubert-Adler Partners; Barry Sternlicht, CEO of Starwood Capital; and, of course, Sam Zell, Chairman of Equity Group Investments. We also heard from the Wharton School on the prospects for the property markets. My goal in this annual summary is to try and summarize the overall mood of the real estate industry as reflected by the presentations at the meeting.
The mood of the meeting over the last few years was optimism tempered by “uncertainty”. While there is clearly still “uncertainty” (particularly about how the Fed will proceed and the long term impact of the Fed’s actions over the last several years), I think that the success that many, if not all, of the participants experienced over the last several years has overridden their concerns about the on-going uncertainty in the economy. My perception was that many panelists were disappointed that the tremendous opportunities that the real estate industry had been able to take advantage of over the last few years were now starting to thin.
In 2010 and 2011, the attitude of the participants was very positive. In 2012, after the downgrade of the United States’ credit, the European economic situation, and the volatility in the financial markets, the attitude was very cautious. By 2013, attitudes were again positive but there was strong concern about interest rates and the debt.
In 2014, after the huge gains in the stock market and recognition of how well investments over the prior few years were turning out, things were extremely upbeat, tempered only by the concern that interest rates would eventually rise. However, even that fear of higher interest rates was counterbalanced by the expectation that higher interest rates would arrive in the context of better economic times, higher rents, and higher property values.
In terms of the various sectors, the panelists remained most bullish on multi-family and single family. The fundamentals for housing remain extremely strong. The primary on-going risk is the potential of overbuilding in multi-family.
Office was perceived as challenged due to decreasing space requirements of tenants and the impact of gentrification on demand for suburban office. These issues, however, were being offset by the absence of new construction and the feeling that, as a result, supply would tighten and rents would increase.
Similarly, new construction of retail was down by 92% since 2006, leading to higher occupancy and higher retail rents. Unfortunately, this perceived upside was tempered by the ongoing concern regarding the impact of the Internet on brick and mortar sales.
Rather than concluding with my opinion, two quotes do a nice job of summarizing the mood of this year’s Zell-Lurie meeting.
First, recognizing the abundance (or overabundance) of capital in the current real estate market and its impact on the market, Peter Linneman, Wharton Professor Emeritus of Real Estate, Finance and Business and Public Policy, pointed out that “Fundamentals matter, but capital wins!”
Finally, succinctly summarizing the outlook for 2014, Howard Marks, CEO of Oaktree Capital Management, an admitted contrarian, said with respect to the current market, “Move forward, but with caution. It is not a time to be defensive, but it is a time to be cautious.”