Friday Letter The politics of real estate

As Tip O’Neill, the former speaker of the US House of Representatives, famously said: “All politics is local.” And, according to the conventional wisdom, so is the real estate business. At the Pension Real Estate Association conference in Washington DC earlier this week, the nexus between real estate and politics was on full display.  

Delegates started the evening schmoozing over cocktails in the shadows of the halls of power, the Library of Congress—one of the capitol’s many architectural marvels and an impressive piece of real estate in its own right.

But the dome of the Capitol building cast its shadow over more than just the opening soiree. With the midterm US Congressional elections less than two weeks away—and many predicting that the Democrats will gain at least one of the houses of Congress—delegates wondered aloud what the future holds for investors when it comes to both politics and monetary policy.

And, who better to answer those questions than a Washington icon of a different sort—Alan Greenspan, the now retired chairman of the US Federal Reserve. Before dinner on Wednesday night, delegates were treated to a no-holds barred discussion between Greenspan and Bernard Winograd, the chief executive and president of Prudential Investment Management. And, unlike your typical conference event, there was neither an empty seat in the ballroom nor a Blackberry in sight.

The man who was often considered more important than any of the four presidents under which he served not only packed the house, his mere presence set it abuzz. Before the evening’s discussion began, outsiders who wandered into the room may have expected the imminent appearance of a major Hollywood star—such was the level of excitement and chatter—rather than the bespectacled, unassuming older gentleman seated on the dais.

And “the oracle,” as some call him, did not disappoint, his usual candor in evidence.

“I, frankly, think it is unethical for the government not to tell it like it is,” Greenspan told the crowd.

He discussed the highly globalized world we now live in and how the markets have changed so much that $1 trillion no longer represents a shocking figure in the global economy.

He called the current state of the real estate market highly volatile. The current boom has been a fascinating period, but like the delegates had heard earlier in the day, he said it isn’t going to last. (Click here for the related story on the first day’s events at PREA.)

Yet despite the recent softening in the housing market, which has been an engine for economic growth in recent years, the US economy continues to prosper—a mystery, even to Greenspan.

“The markets have held up for reasons we do not yet know,” he said.

Such ambiguity may be why so many delegates in the room were shifting their focus away from the US and towards international markets. However, even there, Greenspan had some words of cautionary advice. Given the credit risks taken by developing nations, “something has got to give,” he told the assembled masses.

Both politics and real estate may be local, but in today’s environment, it seems uncertainty about the future spans the globe.

PS. Now is your last chance to register for the 2006 North American Private Equity Real Estate Forum, being held in New York City on November 1 and 2, featuring a keynote speech from Jay Mantz of Morgan Stanley and one-on-one discussions with Barry Sternlicht of Starwood Capital and Jeff Kaplan of Westbrook Partners. Sign up here