“Widespread Panic, Starting Today”

Some Congressional leaders who initially seemed to accept the decision [to rescue AIG]…sharply questioned the move on Wednesday.

—The New York Times

It was a chance to listen to two of the world’s most successful real estate moguls—Sam Zell and Vornado’s Steve Roth—talk about the state of their business.

It was also a chance to revisit the hallowed halls of our alma mater, the suddenly and shockingly no-longer-independent Merrill Lynch, at that firm’s Global Real Estate Conference.

The venue, at 4 World Financial Center, was different than when we crunched oil supply and demand statistics for the Thundering Herd nearly 30 years ago in a windowless cubicle at One Liberty Plaza, right next door to what was then the Twin Towers.

Still, “Mother Merrill,” as most alum call the place, remains just that, although many we saw wandering the corridors seemed to be in a state of calm shock after the last month’s events. For the most part, they seemed more relieved than angry that the firm had been rescued by Bank America.

Our object yesterday, however, was not to check in on Merrill. It was to listen to Zell and Roth talk about what the heck was happening in the real estate markets.

And talk they did.

They also performed a kind of Mutt and Jeff routine reliving last year’s Equity Office Properties deal, when Roth’s ferocious bidding for Zell’s company pushed up the price of Equity Office Properties by $5 billion before Blackstone snapped it up at what will certainly go down as a peak-of-the-market top-tick if ever there was one.

Zell, for his part, modestly denied being a seer by selling office properties at the top. He simply pointed out that the office business “is a very capital-intensive business,” and “you didn’t have to be a great guru to look at the office market a year and a half ago and say, ‘it can’t continue.’”

The blustery Roth made Zell look positively demure. He defended Vornado’s bid for EOP, pointing out that it was half-cash, half-stock. And since Vornado’s stock price is down since then, he rationalized, “we were trading a portion of our assets at a high stock price.”

Maybe so.

But the more interesting comment on the state of the world came in the next session, which involved three less famous, but quite successful, real estate companies from around the world.

After much discussion about cap rates in London and Germany, and the difference between Canadian and US office markets, a question from the audience brought the crowd to attention. It was about what, if any, impact the three companies had experienced from this week’s events—specifically the bankruptcy of Lehman and the rescue of AIG.

The response was about as clear as it could be: “We have debt guaranteed by AIG,” one of the men volunteered, as do most real estate investment trusts he knows.

And if AIG had not been rescued by the government, he said quietly but firmly to the several hundred people in the room, “There would have been widespread panic, starting today.”

Quote, unquote.

We did not notice any so-called Congressional leaders in the room.

Too bad. They should have been there.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

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