Spring Members’ Meeting 2000
As every iron-bellied investor these days
Philadelphia last month, said that in the first
knows, U.S. stock markets have been going quarter of this year, volatility has been
through a highly volatile period.
extremely high, by historical
Hardly a week goes by when the
standards. While stock market
Dow and the Nasdaq indices are
returns have been exceptional, he
not swinging sharply—either up or
sees three important trends to which
down. What accounts for this
investors should pay attention.
volatility? What is a sensible
First, the strong returns have
investment strategy for executives
been produced by a narrow band of
who do not want to be blindsided?
stocks, particularly those of
John J. Brennan, CEO of The
technology companies. Second,
Vanguard Group, the second
some stock valuations appear to be
largest mutual fund company in the
high. For example, historically,
U.S. — the
price-earnings
c o m p a n y
ratios based on
Mr. John Brennan, Chairman and CEO, The Vanguard Group, speaking on his
manages assets
forward earnings
view of the Markets at the Spring Members’ Meeting
worth more than
have been between
$500 billion —
12 and 20. In
has some thoughts about that.
March, however, the P/E ratio of stocks in the
Brennan, who spoke at a meeting of the Samuel
Nasdaq 100 index was 108. This reflects
tremendous bullishness among investors about
the future, according to Brennan. Third, the
ratio of margin debt to household income has
reached very high levels. All these factors
combine to add an enormous level of risk to the
stock market. The rise of so-called momentum
investing—in which investors find out what’s
hot and join the party—further adds to the risk
What, then, should investors be doing?
Brennan said that investors should not forget
the lessons of the past. His advice was to resist
short-term temptation when investing in stocks.
Secondly, he urged diversification, which
Robert Lieber, Jon Zehner and Robert Larson
guards investors against their own ignorance.
Third, he recommended that investors have a
Zell and Robert Lurie Real Estate Center in plan—and that they stay calm.
In addition to the state of the stock
market, several other issues came up for
discussion at the meeting. Among them: Trends
in public and private real estate capital markets,
new revenue-generating opportunities in real
estate, and the future of real estate.
Joseph Gyourko, director of the
Zell/Lurie Real Estate Center, moderated the
discussion about trends in the capital markets.
The panelists included Richard Adler, managing
director of European Investors; Jeffrey M.
Kaplan, President of Cohen & Steers Capital
Partners; Matthew Lustig, Managing Director of
Lazard Freres; and Bernard Winograd, CEO of
Prudential Real Estate Investors.
These participants discussed the reasons
why investors appear to have lost their appetite
for large-scale, complex deals. “The past year
and a half has been unusual,” said Winograd.
“We have been in an extended period where cap
rates have been moving up, and demand and
supply have been roughly in balance. Most
institutional investors see this as an equilibrium
condition. And we aren’t used to being in
equilibrium; we are used to riding a cycle.” Other
panelists pointed out that while investors are
increasingly unwilling to take equity risks, the
transaction volume, too, has declined. Several
real estate investors are targeting property types
such as apartments and industrial real estate,
which are likely to outperform the market in a
future downturn.
Another session focused on new
opportunities—including the Internet—that real
estate companies could pursue to generate
revenue streams. Moderated by Asuka Nakahara,
Associate Director of the Zell-Lurie Center, the
panel for this session included Julie Benezet,
Director of Global Real Estate and Facilities at
Amazon.com; Dale Anne Reiss, Global Industry
Leader of Real Estate at E&Y Kenneth
Leventhal; Julien J. Studley, CEO of Julien J.
Studley, Inc.; Richard Michaux, President and
CEO of Avalon Bay Communities and Randall
Von Feldt, Managing Director of operations in
the Dallas office of Scient.
Benezet provided a fascinating glimpse
into the way dot-com companies, whose
business models have more to do with clicks
than bricks, operate in the real estate business.
For all its furious activity in cyberspace,
Amazon.com did 26 real-estate deals last year
and built 6.5 million sq. ft. of real space,
including offices, warehouses, and call centers.
Since dot-com companies tend to grow rapidly
through acquisition, they like dealing with real
estate providers who are flexible. “Landlords
that prevail with us have the ability to add more
space,” Benezet said.
Studley agreed. He pointed out that
three things make dealing with dot-com clients
different: They move fast, they have small
staffs, and they share decision-making. “We got
a new client from this industry, and they first
wanted to meet our technical people, not our
deal people,” Studley said. “This is not the way
we did business. Our older clients can learn a
lot from them.” The increasing importance of
the Internet is forcing more real estate
executives to take it seriously. Michaux said he
now spends 60% of his time on “the
convergence of
the Internet with
real estate.”
Has the
coming of the
Internet created
an environment
where the old
adage “location,
l o c a t i o n ,
location,” is no
longer relevant?
The panelists did
not think so. On
t he cont rary,
urban centers
have benefited
William Mack introducing the keynote
speaker, Thomas L. Friedman
from the dotcom revolution,
primarily
because cities provide housing, retail and
entertainment—all conveniently located
together. Cities such as Seattle and San Francisco
have gone through major changes and
improvements.
“The suburbs
destroyed the cities,
but the Internet is
bringing them
back,” said Studley.
In addition
to the Internet,
globalization is
transforming real
estate. Thomas
Friedman, New
Thomas L. Friedman, Foreign
Affairs Columnist at the New
York
Times
York Times, offers a fascinating
columnist and
perspective of globalization
author of such
books as “The
Lexus and the Olive Tree” and “From Beirut to
Jerusalem,” discussed the forces that are drawing
national economies into the global market.
“Globalization is not a trend or a fad,” he said.
“It is the system that has replaced the Cold War
system. Globalization will affect every country,
company and community.” Explaining the
difference between the Cold War system and
globalization, Friedman pointed out that while
the former was based on division, the latter is
based on integration. “The Cold War system was
built on weight; globalization is built on speed,”
he said.
Globalization is the result of the
democratization of finance, technology, and
information, according to Friedman. “These
three factors converged into a whirlwind at the
end of the 1980s,” he said. “The information
revolution created cyberspace.” And when
walls—political and economic—began to fall, it
opened up new opportunities as well as threats.
“When the walls fall, we are all in each other’s
business,” Friedman noted.
The final session brought together three
experts—Michael D. Fascitelli, President of
Vornado Realty Trust, Michael J. G. Topham,
Executive Vice President of Hines, and Samuel
Zell, Chairman of Equity Group Investments.
They peered into a crystal ball to look toward the
future of real estate over the next five years.
Today, many youngsters view real estate as a
plodding, old economy industry that lacks the
sex appeal of the dot-com world. Still, for those
who have the vision and the energy, real estate
provides—and will continue to
provide—incredible opportunities. “Real Estate
is a giant industry,” said Zell. “Two years from
now, we’ll look back at the dot-com mania and
see the replication of what happened to real
estate during the 1980s. It was an industry
destroyed by over-allocation of capital. We are
witnessing a massive distortion of the
economy, and it’s going to be very expensive.”
The panelists also saw another major change
Panelist Samuel Zell answering questions on
future growth in the industry
emerging over the next five years. Oligopolies
are coming into existence, and “five years from
now, the real estate industry will be divided
between creators of product and operators of
product, though there may also be companies
that do both,” they said. “We will have to
adjust the way we operate and think.”