A Property Investor
Looks at the Future

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Taking a new spin on an old ad slogan, when Lehman Brothers talks, people listen. Little wonder. The Manhattan-based firm's global real-estate investment-banking operation was responsible for some $15.2 billion in total transactions last year, part of a $150-billion track record the group chalked up over the past five years. For the record, that deal volume covered the waterfront, from CMBS issues ($50 billion in the above-mentioned time frame) and corporate and mezzanine debt to initial public offerings and private equity placements (the group's $1.6-billion private equity fund, closed in September 2001, invests in a range of asset types domestically and in Europe). It's not surprising then that managing director Robert C. Lieber's view of where the investment market is now and -- more importantly -- where it's going, is informed by the global reach of the group's 240 real-estate professionals. Mr. Lieber, who heads up the group with managing director Michael Mazzei, sat down with me recently to share his thoughts on the state of the investment market.

GlobeSt.com: It's no secret by now that the market has outperformed other investment alternatives. What's your take on the drivers behind that phenomenon?

Lieber: The performance of real estate, whether it be in fixed-income, equity or other markets, has outpaced that of the broader sectors -- the S&P, Nasdaq, whatever metric you'd like to use. And there are a couple of reasons for this. It's a cash-flow-driven business, not a pure futures business, and markets are paying up today with predictability, which investors always value. But the predictability of cash flow makes real estate especially attractive.

GlobeSt.com: But aren't a lot of investors buying more for future returns than for current cash flow -- as others have told us?

Lieber: Actually, there are investors out there who are buying assets today with the idea that even if they sold the assets five years from now for less than they paid, they still got a better return than if they looked at some of the alternatives.

GlobeSt.com: That seems counter-instinctive to how most investors operate.

Lieber: Not when you come off of a three-year tech run-up and the whole thing evaporates. If an investor can get a 9% dividend yield, he's OK -- even if the asset goes down in value. Where else in the broader market can I achieve those kinds of returns? That's why it's a great time to be a seller. Their question then becomes where they can re-reinvest. Some investors see very attractive returns buying new because the leverage in the debt market is so attractive that equity returns will be relatively high, particularly compared to the alternatives.

Having said all that, it should be noted that there has been a lot of activity around the financing markets -- CMBS and the secured market, for instance, and volumes will be every bit comparable to 2002, which answers a concern at the beginning of this year about the feasibility of keeping volumes up. The thinking was that rates have been so low for so long now that a lot of the refi activity that could occur has already occurred.

GlobeSt.com: How do you answer that?

Lieber: I say that the rates are continuing to come down and defying people's odds so there is still a fairly large volume of transactions getting done. So as strong as last year was, this year could be comparable.

GlobeSt.com: How long do you think that dynamic will continue?

Lieber: Who knows about interest rates? When you see where the treasury market went recently with a new terrorist threat, mad-cow disease in Canada, the ongoing SARS scare, rates continue to come down and prices go up and spreads are tightening. All-in borrowing costs are 5% or lower on relatively well-leveraged assets. The thing that is amazing to me is that there hasn't been a lot of acquisition done by public companies. Prices have been attractive and the financing environment has been strong, but they lament that there's just not a lot out there to buy.

GlobeSt.com: Let's look quickly at the European market. There have been some serious dispositions there. What's driving it?

Lieber: There have been a fair number of large transactions getting done, which represents the divestiture of non-core and other real-estate assets by companies that need to raise capital to improve their return metrics and pay down debt. Another phenomenon in Europe is the number of companies that have been trading at big discounts to NAV and going private as a result. Some of that is driven by the low-interest-rate environment but also by the fact that in some European markets, the public structure was never quite as well embraced as it is in the U.S.

GlobeSt.com: Let's develop that for a minute. How do you see the ebb and flow of public to private changing?

Lieber: There's been a new layer of controls introduced to the public markets that has the net impact of driving some of the public companies back into a private form. Sarbanes-Oxley, for all the good that is intended, is going to cause a number of existing management teams to decide they'd rather operate in a private format.

GlobeSt.com: Isn't that really simply a way of skirting Sarbanes-Oxley?

Lieber: No. The cost of doing business in the public market has gone up, the burden of compliance has gone up and this will drain some of the returns to existing shareholders -- particularly for the smaller-cap guys. The increased scrutiny and governance will cause those who are on the margin to elect to not participate in that format.

GlobeSt.com: But as you indicated, these are marginal. We won't see a wholesale movement to private status, will we?

Lieber: You won't have as many going private as went public in the '90s. But, given the issues of succession and the competition for capital in a public format, as well as the incremental burden of being a public company, you will see fewer public companies in the existing group. In addition, you don't see many companies lining up to go public. And that's too bad because investors ideally need more companies -- or at least more with larger market caps -- in which to participate.

GlobeSt.com: What about the consolidation that seems to be trending through the investment-management arena?

Lieber: From what I've heard, lenders are saying there's too much capacity in the lending market. There seems to be a huge compression on fees and a real strain to make the numbers work.

GlobeSt.com: What's the upshot?

Lieber: This is Darwin at his finest -- not just the strongest and biggest but those that are most able to adapt and change quickly will survive. That's the climate we're in right now.

Email your comments to rjeditor@dowjones.com.