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Jan 16 2007


The panel for this session consisted of Mark Goldstein, Senior Vice-President of Equity Residential, David Kirshenbaum (KSM ’92), Senior Vice-President of Operations of Joseph Freed and Associates, LLC, and Walter Rebenson, Vice-President of Development for Avalon Bay Communities. The session was moderated by Richard Mattoon, Senior Economist for the Federal Reserve Bank of Chicago, and focused on the current depressed situation in the residential market and on identifying future opportunities.

Current Situation

First, everyone agreed that the overheating of the real estate market started soon after the bursting of the dot-com bubble. Low housing prices at that time, along with low interest rates, further contributed to this market trend.

What we observe today is obviously a price-correction phenomenon, which is also emphasized by the higher interest rates. Unanimously, the panelists agreed that this phenomenon was ongoing and could be expected to last between 18 and 36 months, with an average expected correction factor of about 15 percent.

Moreover, subprime mortgages where pointed out to be at the origin of both last year’s boom as well as the actual turmoil. The panel did not directly point to the defaulting individuals but rather to large hedge funds and other financial investment institutions that benefited from sizeable returns during the high-growth and low interest rate period.

The panelists also raised concerns regarding large inventory levels that absolutely must be controlled and reduced. Developers indicated that approximately 20 percent of their deals did not close, leaving those properties still available on the market.

Finally, the panelists pointed out that the highly negative newspaper headlines have been hurting the industry. This phenomenon is believed to greatly contribute to the decrease in consumer confidence.

Future Opportunities

The following are some of the more significant future opportunities and challenges discussed by the panel.
The rehab activity of existing assets could represent an attractive economical model in the future.
First-time homebuyers are still willing to invest in their family house.
For several years housing prices were set by the developers, whereas today developers must use more-aggressive selling techniques with incentives to secure closing.
For new project development, panelists believe that mixed-use projects including transit solutions will meet a higher demand. Regarding new developments, the panel also raised concerns about the municipality “dictate” related to zoning policies.
Finally, the panel agreed that people in the industry will need to be patient, accept lower margins and be very cautious about where they invest and what they invest in.

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