By Daniel Joels '14 and Ashley McDonald '15
Introduction: Michael Berman '86, Chief Financial Officer, GGP, and Chair, 2013 Real Estate Symposium Steering
Committee Moderator: Lynne B. Sagalyn, Earle W. Kazis and Benjamin Schore Professor of Real Estate and Director, Paul Milstein Center for Real Estate and MBA Real Estate Program, Columbia Business School
Panelists:
David J. Neithercut '82, President and CEO, Equity Residential
Richard B. Saltzman, President, Colony Capital
David E. Simon '85, Chairman of the Board and CEO, Simon Property GroupDonald Wood, CEO, Federal Realty Investment Trust
Michael Berman '86 introduced this panel, the closing session of the day, by pointing out that the value of a real estate company is typically thought of in terms of the value of the assets that it owns. In this discussion, we look beyond the value of the assets and focus on the critical issues that CEOs in the real estate industry must contemplate for their companies. The panelists discussed the branding implications of the term "REIT," their challenges in the industry, and the emergence of e-commerce as a competitor.
Overall sentiment among the panelists was that the term "REIT" is ambiguous to the general investor and causes public real estate companies to be viewed differently than other public companies on the stock exchange. Neithercut feels that the term has come to be understood as "publicly traded real estate" and that this may be a good thing as more and more people call for portfolio allocations to REITs as a separate asset class. Most other panelists find the word "REIT" to be a limitation on the sector and expressed a preference to be known as public real estate companies. Simon went a step farther and said that he would remove the word "Property" if he were to rename his company, because he would prefer the firm to be viewed as a company rather than a real estate company. In terms of the actual REIT industry, Saltzman and Wood believe that the real estate model is best suited for long-term investment horizons and that we should expect to see continued consolidation of the industry with REITs controlling the highest-quality assets.
Sagalyn next asked for the panelists’ thoughts about the recent REIT price correction in the market. The panelists firmly believe that this resulted from lack of sophistication among general investors with respect to real estate. Most general investors who trade REIT stock are basing decisions on broad market economics such as higher interest rates rather than evaluating the actual real estate assets and the stability of cash flows in high-quality commercial properties. Saltzman stated that quality real estate will likely continue to do well in the coming years but that there will be a tug of war between the improvement in real estate operations versus the impact of rising interest and cap rates in the overall market. Simon pointed out that REIT cash flows are more stable than most investors realize, and that, contrary to popular belief, the majority of REIT cash flows did not decline during the Great Recession.
The discussion also touched upon an array of issues that CEOs grapple with as they look forward. As a CEO, Simon is focused on how he can improve his product, specifically in the context of service. Simon expressed that the mall industry must improve service by creating a hotel-caliber shopping experience. He pointed to Amazon as a paradigm—and a threat to the retail sector—because Amazon is always improving its products. He suggested that to compete, the real estate industry must also improve its products. Wood expressed concern about potential tax reform down the road and how that may alter the structure of REITs. Echoing Sam Zell’s keynote from earlier in the day, he alluded to the fact that the REIT sector is a relatively young industry and that a lot can change. Neithercut’s primary focus is his company’s overall strategy, while his employees focus on the day-to-day tasks. Saltzman, the lone CEO of a private company, says he must constantly strategize as to which businesses and asset classes to invest in and how to best capitalize on those investments.
The final topic that the panel addressed was the growth of e-commerce. Wood believes the best defense against e-commerce is owning real estate in densely populated, affluent, high-barrier-to-entry markets. Specifying further, owning experiential real estate properties is crucial. Mixed-use developments that integrate a combination of retail, restaurant, residential, office, and other entertainment uses best achieve this goal. When people come for a social experience, this differentiates brick-and-mortar stores from online shopping. Simon again emphasized his point that the retail industry must provide better service to compete with e-commerce. He also mentioned that several retailers, rather than focusing on improving their stores, are selling their own branded products through Amazon. Simon believes this is very dangerous to retailers as it diminishes their brand value. As an industry, retail owners and landlords alike need to come together and get behind a plan that will combat e-commerce. Simon is not sure of the exact strategy yet, but says that it needs to be innovative, similar to the way that the development of the shopping mall concept brought customers to cornfields.