A tale of two conferences

Last month, at a private equity real estate conference in Laguna Beach, California, many of the delegates expressed a rather surprising sentiment: optimism. For the past two years, it seems, real estate gatherings have been a forum for industry heavyweights and gray-haired veterans to rail against the amount of capital flooding into the property sector. Too many unsophisticated players and too much cheap debt was creating an environment, so the conventional wisdom went, that was unsustainable.

Yet last month on the shores of the Pacific Ocean, notes of dissonance were in short supply. Attendees at the three-day event were told that the US economy is growing, property fundamentals are improving, interest rates are still relatively low (and are expected to remain there), the slump in the housing market has not had a significant ripple effect, construction costs are putting a damper on new supply and real estate continues to generate strong returns. As Alan Pontius of Marcus & Millichap noted during the opening panel: “It is difficult to be anything but positive on the economy,” a sense of optimism that, according to many of the panelists, extended to the real estate sector. Could there be a downturn in the market? Maybe. But over the next two years, barring some exogenous shock to the economy, it was dif-ficult to see how.

Perhaps it was the venue. After all, it is tough to be gloomy when the temperature hits 70 degrees in January and foie gras canapés are served on a grassy bluff overlooking the ocean. But that wouldn't explain the strikingly different mood two years ago, at the very same conference in the very same location with many of the same participants. Back then, attendees were staring aghast at the run-up in US home prices, the wave of capital entering the asset class and the degree to which cap rates and yields had compressed— all at a time when there was significant uncertainty surrounding interest rates, the US economy and market fundamentals. At the opening panel for the 2005 conference, Baynorth Capital co-founder Chip Douglas compared the real estate markets to someone popping a painkiller: it feels good in the short-term, but you know there is still an underlying long-term problem.

Markets don't crash when everybody says they are going to. They crash when nobody expects it.

Fast forward to today and while the US housing sector has certainly stalled, the broader property markets continue their spectacular run. And if there was any doubt about the industry's optimistic outlook on the future, one needs only to look at the fierce takeover battle for Equity Office. Liquidity still remains at an all-time high, but that past sense of fear—of capital overwhelming fundamentals, of too much cheap debt, of a market correction—seems to be fading. In its place is a recognition that capital abundance is here to stay and complaining won't make it go away. Better to smile and take advantage of all that cheap capital when you can.

The sense of optimism expressed last month in Laguna Beach was echoed at another conference in January, albeit one held halfway around the world. At the World Economic Forum in Davos, Switzerland, private equity titans mingled with world leaders and public company CEO's battled for their attention (and their dollars). Steve Schwarzman was as big a draw as Bono.

Yet the scenes at Davos and Laguna Beach may be the wrong ones to focus on. In these heady days, perhaps the right conference to look at took place back in 2005 at a private equity conference sponsored by Citigroup in Miami. There, Citigroup founder Sandy Weil delivered a speech that, at one point, touched on the US real estate market. At the time, there were widespread predictions, both in the popular press and the real estate community, that the asset class was headed for a major correction. Weill, however, saw things differently. Markets don't crash when everybody says they are going to, he said. They crash when nobody expects it.

They crash, in other words, when the champagne is flowing, the sun is shining and the adulation of the financial community is at its peak.