COVER STORY, SEPTEMBER 2004

REAL ESTATE OUTLOOK FULL OF OPPORTUNITIES, CHALLENGES
Michael Bedke

Recovery was the theme of a recent gathering of commercial real estate leaders to discuss the market outlook in 2004. The real estate industry has become an integral part of the global economy, while its increasingly sophisticated nature has prepared it to excel in an economy characterized by global outsourcing, economic recovery and anticipated rising interest rates.

These topics were among those discussed by some of the most respected industry leaders in real estate during the recent Piper Rudnick Real Estate Summit in Chicago, attended by more than 650 top professionals.

Talk of economic recovery and abundant capital in 2004 was tempered by dialogue about outsourcing and security risks. However, upon leaving the gathering of industry leaders, there was little doubt that the present economic conditions offer the best opportunity to sell while identifying markets and assets that fit strategic long-term portfolio goals.

Piper Rudnick Co-Chair Lee Miller opened the conference by providing perspective on the current market: “Over the past 25 years, I can never remember a time when the real estate markets presented as many challenges — and opportunities.”

Michael Fascitelli, president of Vornado Realty Trust, explained his perspective on the challenge facing investors today: “In many ways, the challenge is balancing the market now with what we will want in 10 years.”

Debunking the Impact of the ‘Jobless Recovery’

According to leadoff speaker Sam Zell, chairman of Equity Group Investments, “We’re coming out of a real estate recession, not a depression. That is a critical distinction in the context of today’s economy.”

Zell went on to criticize the common misperception of the challenges associated with a ‘jobless recovery.’ “Every economic recovery falls into this category,” he explained. “The same was said in 1993, just before we experienced a major economic boom that, unfortunately, became a bubble.”

Multifamily and office markets were most affected by the post-bubble economy as well as the events of September 11, 2001, according to Zell. However, multifamily now represents the segment of the industry with the most potential for recovery. “The recovery that we’re talking about today is strong and real. In my estimation, the multifamily segment will be the first to benefit.”

Zell and other panelists were quick to note that while the real estate industry is “behaving” in a manner that demonstrates recovery, this is not true in every market throughout the country. “However, in the tougher markets like Boston, we’ve seen the rate of growth go from negative to flat,” Zell explained.

Real Estate — The Last True Oligopoly?

Zell made the point that the real estate industry can change the nature of the investment market because there are few sellers of real estate products in a capital-rich market. Other speakers at the Summit supported Zell’s assessment of real estate as “the last oligopoly.”

“Real estate has gone from a highly fragmented, entrepreneurial business to an oligopoly…every industry does,” Zell said.

Additionally, the Sarbanes-Oxley Act1 continues to have a tremendous influence on business, including obtaining credit. For example, Ray Ritchey, executive vice president of Boston Properties, explained that the new regulations have indirectly influenced how to adapt to valuation. “The market has become less discerning regarding credit in the wake of Enron and WorldCom. People became conservative. But now we’re moving back to the middle ground. Credit is in the eye of the beholder,” commented Ritchey.

According to Robert Larson, chairman of Lazard Freres Real Estate Investors, “Public real estate companies are still learning how to deal with quarterly reporting.”

Speakers also discussed the fact that while the legislative calendar is truncated because of the election year activities, it is still important for real estate professionals to provide Congressional support for current legislation regarding the Terrorism Risk Insurance Act (TRIA), which expires in 2005. Jeff DeBoer, president and COO of The Real Estate Roundtable, said, “Real estate professionals need to help shape the debate in Washington and get TRIA extended.”

A More Sophisticated Industry Ready to Embrace the Recovery

While participants of the 2004 Piper Rudnick Real Estate Summit agreed that the looming recovery is real, panelists also noted that the industry has become more sophisticated and is perhaps better poised than ever to capitalize on the economic rebound.

“Owners have gotten increasingly sophisticated through the use of technology, which has resulted in a boost in productivity for the industry as a whole,” said Zell. He went on to explain that the distribution of information and the fact that real estate is now a “borderless” industry has made it far more efficient.

“We’re back to becoming efficient users of capital, which bodes well for the entire industry,” Zell explained.

Michael Bedke is a partner in the Tampa, Florida, office of Piper Rudnick LLP.

1 The Sarbanes-Oxley Act of 2002 is a public company accounting reform and investor protection act.

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