"A Very Risky Economy"

Wagenseller Law = Firm=20 Newsletter
March = 29,=20 2007

The Real Estate = Economy

=20

The short = answer? This is a very = risky=20 economic market. =20 That was the conclusion of Dr. Robert Edelstein on = the real=20 estate economy at a recent breakfast meeting. Dr Edelstein is = the Co-Chair=20 of the Fisher Center for Real Estate & Urban Economics = at the=20 Haas School of Business at UC Berkeley. Dr. Edelstein = discussed the=20 critical issues driving the economy right now, including the = capital=20 tsunami (no end to capital flow in sight), subprime issues = (risk of=20 contagion could affect new construction, real estate = services and=20 equity loans), globalization (look how fast and widespread = the=20 global effects of the Shanghai exchange collapse were) and=20 privatization (public companies, including Real Estate = Investment=20 Trusts, being taken private), among other things.

Right now Dr. Edelstein thinks that = the real=20 estate economy looks "comfortable." The economy is = showing good=20 strength, stability and resiliency. Population and = economic=20 growth are driving demand, while capital markets favor real=20 estate. = Lastly, there=20 is a low interest rate environment. (When asked where = rates are=20 going, the professor said he would not be in this business = if he=20 knew that).

Why Privatization is=20 Occurring? =20 Many REITs, such as Equity Office = Properties (EOP), are=20 being taken private. = (He labels Blackstone's purchase of EOP as a = "high risk",=20 highly leveraged transaction premised on rosy predictions = that may=20 not come to pass.) =20 There is an abundance of institutional and = opportunistic=20 capital, bountiful cheap debt, and the chance for arbitrage = by the=20 buyer with the "pre-sale" of sub-portfolios or key assets = (again,=20 look at the pre-sale of key assets in the EOP deal). On the sell side, = the=20 'alternative' valuations and high price income multiples = make=20 selling very attractive. =20 While some companies point to the increasingly strict = governance costs for a public company, Dr. Edelstein = downplays this=20 argument since pension fund investors in hedge funds = will often=20 want more information, not less, than Sarbanes-Oxley and = other=20 regulations require.

What is driving (and will = continue=20 to drive) the U.S. economy? Dr. Edelstein = points to=20 technology, defense and security spending, biotech, the next = baby=20 boom, retirement, health care, financing and securitization = (and=20 other financial engineering).

What is happening=20 globally? = The=20 growth locomotives of the world are the United States, China = and=20 India. He = noted that=20 China has an incentive to keep interest rates low in the = U.S. right=20 now, but wonders whether they will always think so. China also faces = problems in=20 that they are essentially 'importing inflation and = exporting=20 deflation.' = China=20 is no longer the lowest cost producer for some goods and the = one=20 child rule is leading to a quickly aging population. He believes that = China will=20 be the next big residential securitization. (Did you know that = there are=20 570 Wal-Marts in China?). =20 He also finds it ironic that China is a meritocracy = (a no one=20 from the countryside can succeed in business in China) but = not a=20 democracy while India is a democracy but not a meritocracy = (still=20 vary caste oriented). =20 In many countries, such as Thailand and Russia, = businessmen=20 are trying to compute a rate of "reasonable greed" (or = "profits=20 after stealing") to work into their projections for = government=20 corruption.

How can things get = worse? Dr. Edelstein does = not rule=20 out a U.S.-precipitated world recession in which the = consumer faces=20 death "by a thousand pricks." With rising energy = costs,=20 the Alternative Minimum Tax, unanticipated jumps in interest = rates,=20 fewer and smaller equity cash outs and the prospect that = wage growth=20 could lag inflation, these 'thousand pricks' may take the = wind out=20 of real estate performance. =20 Again, Dr. Edelstein's take home message from his = talk: this is a very = risky=20 economic=20 = market.

Laine T. Wagenseller is the founder of = Wagenseller Law=20 Firm, a full service business and real estate law firm in = downtown=20 Los Angeles. = The firm=20 represents real estate developers, business and property = owners, and=20 investors. =20

For more information visit=20 www.wagensellerlaw.com or contact Mr. Wagenseller at = (213)=20 = 996-8338.