Summary:The real estate industry has gone through immense change over the last 10 years moving from a commodity to more of a balance sheet item. Steven Green set this theme when he stated "[real estate is] treated more as a finance instrument than piece of dirt." Other causes of this transformation to the industry highlighted by the panel include the fact it is cheaper to buy a home than rent now, and the increase in real estate liquidity.
Global political events, such as the potential capture of Osama bin Laden, proved an area of disagreement among the panelists. Steven Green believed that events like Sadam Hussein′s capture did have an effect on the real estate market while Sam Zell countered with the point that real estate was local in nature and job/economic growth was more important. Zell supported his point concerning the local cycle′s effect on real estate by stating "[we′re] almost done with the technological deadbeats," referring to the cycle that occurred in the commercial real estate market caused by the dot.com bubble.
The panel agreed the value of the dollar does affect the real estate market, but the international commercial real estate market is still worse than the U.S. market, so international investors are still acquiring U.S. properties. Zell emphasized the weaknesses in Europe and strength of the U.S. market when he noted, "Europe is going to become Disneyland; the only reason Europe is going to exist is to eat, sleep and visit castles."
The real opportunity in real estate, as noted by the panelists, is debt and the use of real estate as a financial instrument. The real estate market had become very efficient and therefore the economic gains to come from real estate were from the flow of funds around transactions. Tighter spreads and better liquidity have limited profits but disruptions in efficiency were noted by Barry Sternlicht as the time for profits, when the risks and opportunities are recognized. He also illustrated that debt was mispriced and an opportunity for profit as banks have drifted away from real estate lending. Green indicated the ability for profits in real estate transactions when he said "owners don′t know real estate, they know balance sheets."
The panelists all agreed that interest rates would be increasing in the next year, minimally before the November presidential elections, but they also emphasized that inflation is of a major concern. Homeowners would be hurt by rising interest rates and inflation as many families live on the margin of their income. Also of note was the fact that 42 percent of CPI is rent which means the CPI may be understated and that more inflation has occurred than has been reported.
"Every American sees the gas pump" noted Steven Green and this shows inflation. The panel indicated that when American′s see inflation they buy houses. Scott Syphax observed that "in macro, we can no longer afford the lifestyle we are used to," referring to the fact that American′s were financing the equity away in their houses to support their lifestyles.
The panelists concluded by recommending Washington, D.C., Florida, and California as good locations for real estate investment. The overall consensus for the future of real estate was positive.
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