2009 NYU REIT Symposium: Mack, Roth, and Zell Give Frank View of Challenges Facing Commercial Real Estate

By Scott Robinson, Visiting Clinical Professor, NYU Schack Institute of Real Estate, and James Mack, an M.S. in Real Estate student at the NYU Schack Institute, and an owner and property manager of multi-family real estate in New York and Philadelphia

At last month’s 14th Annual REIT Symposium (hosted by the NYU Schack Institute of Real Estate), a group of preeminent real estate leaders—Mack-Cali’s William L. Mack, Vornado’s Steven Roth, and Equity Group Investment’s Sam Zell—discussed the ongoing challenges facing the real estate market. Within the conversation, “The View from 10,000 Feet,” moderated by Wachtell, Lipton, Rosen & Katz partner Adam O. Emmerich, these industry titans frankly assessed the excesses of spending and loose valuation of properties in the past few years but also asserted that current values, particularly in the public market, have fallen below any rational analysis.

While Mack’s forecasts were tempered by concerns about the longer-term impact of the over spending by the American consumer, Zell offered a contrasting outlook. “Liquidity equals value,” he said, offering a mantra harkening back to the market of the early 1990s.

Some key highlights:

U.S. Growth Factors
How will things play out moving forward?  The government incentives will eventually entice small businesses to jump in the game.  Additionally, the lack of regulation in the U.S. compared to other countries, despite its bad name at the moment, will still be an instigator.  Another key ingredient is the growing U.S. population as opposed to many other countries.  As Steve Roth explained, “The seeds of the next cycle being born are upon us, but the timing is an enormous outstanding issue.”

“Survival of the Fittest” REITs
Also prevalent was the idea that the fall of the private commercial market has yet to happen.  REITs are the only true indicator of where the market stands at the moment.  And many REITs may not survive the recession.  The panel subscribed to a “Darwinian” point of view: of the 240 REITs that currently exist, “maybe 15 or 20 are relevant, and the rest aren’t and have to disappear,” said Zell.

Ownership, Yes; Workouts, Not Yet
As loans come due and owners attempt workouts with lenders, Roth explained that “a lot of these loans will be sold into aggressive, hostile hands before they get to maturity so the private landlord is going to find out he has a different lender than he thought he had,” inferring that some of the debt players may choose to own the underlying assets rather than do workouts with owners.

When asked why his company was not taking advantage of current deals, Roth responded, “We’re not going to risk $300 million of capital that we can’t replenish right now to go on some hunting expedition to try to make $50 million without making absolutely certain that we are protected.  If it’s too late, so be it.  There will be plenty of time.  Proper capital management means safety first.”  This position certainly reflected the panel’s experience and gave some insight into why they are where they are today.