Kicking the Dirt
at the
Speed of Light

An address by Clinton Smullyan, Jr.
presented on November 15, 1994 to the MIT Center for Real Estate
at the symposium
"Into the Public Markets: Real Estate and the New Financial Era"

I am especially honored to be here in the heart of the future of real estate education. This morning you heard five truly great intellects each describe a different aspect of the elephantine real estate market. I have the good fortune to bat clean-up and use their work to describe the whole elephant.

I come wearing four market segment hats and thus have four different views of the business:

As a life-long real estate developer, having started "real estating" in the Bronx with my grandfather at age six. Another hat is as the chairman of the Executive Committee of Teleres, which is building the long awaited dynamic real estate capital market and information system. It is a joint venture between Dow Jones, the communications giant, and AEGON, the largest foreign owner of insurance companies in the US. I come with another professional hat as chairman of Mortgage Partners, a purchasers and securitizer of mortgage portfolios. Most importantly, I come as a newly initiated member of the Center.

I am happy to find a lot of old friends in this audience; those of you who know me know that I prefer to insult people one at a time, but due to the fact that there are eight hundred of you, I am going to try to offend everyone in the room at the same time.

Anyone who has been in the business during the last ten years admits to being debased, diminished, devalued, depleted, disenfranchised, disgusted or just disingenuous. This is to say, we have all had a harsh education, its harshness brought about by our own faults as an industry. Make no mistake, the people in this room are the industry and are claimants to both its triumphs and disasters.

My southern grandmother used to tell me of the bird that flew backwards; it didn’t care where it was going but wanted to know where it had been. Unfortunately, most of us have been guilty of this behavior. We have run our businesses looking at yesterday’s news as a paradigm of the future. We have projected ourselves into the marketplace using information that is outdated even as it is used, a classic example of the Heisenberg principal: our own use of information has interfered with the quality of the information itself.

In the professional argot of real estate, we have royally screwed up. We have taken America’s largest capital market and screwed it up so badly that the public view of a real estate professional is somewhere between a necromancer and a necrophiliac. And folks, we earned the rebuke. We sustained and defended a system that allowed a 30-40% asset class devaluation in less than two years and still hasn’t recovered.

The system we have all lived with, trained in and which fed us richly, will not work anymore; our faith in the value of real estate and in our own abilities allowed us to flourish and, ultimately, compelled us to fail. The willing suspension of disbelief, Aguinas’ phrase, will no longer sustain the business. This is not the whining at the bottom of a cycle; this last roll in the muck has not even been a cycle; there has been a genuine structural change in both the business and in the world and much of that change is reflected in the failure of the real estate industry to embrace the cybernetic age.

Some months ago, with my Teleres hat on, I met with the research director of a major lending institution. I asked that he contribute data from his property holdings to a venture, in the interests of the industry, to compile a statistically valid national real estate data base. He answered me, portentiously, thus, "Our data is our proprietary competitive advantage."

Proprietary competitive advantage... as my Oklahoma hunting buddies say, "There’s some words to chew on!" That man’s company had lost so much money in real estate using its "proprietary competitive advantage" that it had needed to get a bail-out, selling control to an outside investor, lest the regulators step in.

Data is not a proprietary competitive advantage unless it is valid. Scattered samplings of data held by even the biggest owners, manager, brokers or lenders is not sufficient for the increasingly complex world of the real estate business. We have proven that the "proprietary" advantage of limited data is destructively mythical. Only the most sheltered data department manager, in love with his own restricted universe, could think otherwise.

That is my last insulting word today.

Now, how do we break the proprietary data mind-set; what else do we do to bring to our industry into the cybernetic age? How do we create a capital market for real estate that conforms to the advantages of other contemporary capital markets?

I would like to present to you my sense of the difference between true contemporary technically-developed capital markets and the current state of the real estate capital markets.

I need you all to use your imagination now. Here are two imaginary lists; on my right are listed the merits and advantages of contemporary, technologically-advanced, true capital markets. On my left are the analogous professional real estate procedures. OK, here we go:

I may have exaggerated a bit so that you won’t fall asleep in your dessert, but the message is fair. Institutions and individuals need to be as value-informed about their own real estate as they are about their stocks and bonds. When Dow Jones did its market research for the Teleres investment, it found that 300 institutions dominated the real estate market and that 40,000 others where capable of investing but did not have a comfortable information resource or notion of liquidity. Think about what it means to bring that 40,000 into the marketplace.

There is a lot of good news. The public markets are taking up real estate in new and exciting ways and, as Mike Miles pointed out this morning, have not yet discovered how thin the available product knowledge is relative to other capital markets. Many industry groups are trying to formulate strategies to penetrate the information age; I note for you particularly the Institutional Clearinghouse efforts of MIT Center for Real Estate Dean Blake Eagle, NAREIT’s goals for disclosure and computation, the CSSA work on commercial mortgage backed securities, the efforts of PREA, NCREIF and NAREIM towards common formats, and many others. In the private sector, among others, MIT Center for Real Estate Director Bill Wheaton and Ray Torto are doing wonderful work in system development with CB Commercial. Work on data sharing is being pursued by Life Comps group. Comps, Liquidity Fund, and REITRAC all have accomplished much, and many others are hard at work.

I was asked to answer the question today of what the future is for real estate and information. We real estate guys are never hesitant to make projections. In this case, I can best answer by telling you what we are doing at Teleres.

We have a compelling dream: It is LIQUIDITY. It is PRICE DISCOVERY. These are Magic Words, previously unheard in the reality of real estate! As Charlie Wurzebach said this morning, we must get there.

Our mission is to create the single national source of comprehensive on-line real estate information and analysis designed to effectively standardize the process for valuing, trading, liquefying, securitizing, rating, hedging, benchmarking and describing commercial real estate, in all its guises.

And, we have the technology, the people, the distribution system and the vast amounts of capital to make that dream as real as real estate itself.

We are building a statistically valid commercial real estate database overlaid by a set of analytic tools and decision support systems never before possible. Previous efforts to accomplish this intuitively necessary mission, some as early as 1951, have fallen short for three primary reasons:

We are building a property analysis system based on the real markets, not the guesses that have dominated the business. The foundations of pattern recognition technology, data mining and data exploration, relational algorithms, and neural logic linking are beyond my ability to explain, but we have a crew of brilliant young scientists who would be happy to have someone listen to them. Jeff Maier, the most brilliant of them is here today; feel free to corner him.

We are building on-line real time market analysis products that have the capacity for full interactive sensitivity analysis -- by your most sensitive analysts.

We are building analytical programs for public market real estate instruments that will cross the border, finally and fully, between real estate and stock market standards.

We are building the ability for all of you to shuffle your properties into the deck and get real answers through the logic of linking all these programmatic wonders. Imagine, for example, uploading your property data for each property in your portfolio into the Teleres property analyst program, asking Teleres to automatically restructure your portfolio as if it were a REIT, have it find the most nearly comparable existing REITs currently on the market, adjust the comparison for any set of relevant factors, see how the market would price your portfolio and-- hot damn! -- hot-off-the-press, true price discovery!

Imagine sending an interest in your CREF or a debt instrument secured by your REO portfolio through the analytic system, have it rated automatically, send it through the Teleres trading system, and have it sold by a trading desk at any of the major Wall Street houses. Abracadabra! It’s liquidity!

This is a limited example of the capacity designed into Teleres.

That’s Teleres and that is also what the future looks like. It isn’t a distant future... We will be on-line with beta product in the second quarter of 1995, five months from now. We will be commercially on-line three months thereafter. We have whiz-bang demos now so that you can reach out and touch it. In the room today are Phil Jennings, the CEO and founding visionary of Teleres, Mitch Schoch, the steely-eyed managing director, Jeff Johnston, a product adviser to Teleres and a recent graduate of this superb MIT program, and Jeff Maier, the technology whiz; any of them would be as please as I to talk your ear off on the subject.

However, and this is seminal, electronics will never replace the people in this business. No one will write a program that can kick the dirt or fall in love with an idea, or be inspired by the smell of fresh poured concrete, or build an edifice out of conviction and sheer persistence. No computer will ever, ever, ever replace wisdom, character, judgment, vision, or sacrifice.

More importantly, and here I put on the hat of an industry evangelist, WE MUST... all of us must, dedicate some part of our intellectual capital, or spiritual capital and our fiscal capital, our time and efforts, to making real estate a true capital market. We are the present and future leaders of the business. We can make it happen faster... or we can slow it interminably. Folks, the information age train is leaving the station at the speed of light. We must be aboard.

Together we can create a real capital market with true liquidity and valid price discovery. We can bring institutional and individual capital into the market on a comfortable and global scale hitherto unavailable. It has already started.

The impact of the information revolution in real estate will make available a whole new set of tools and thus create a whole new capital market. But, these are decision support systems; it remains our responsibility to make the decisions. These new sophisticated tools will allow the best and brightest, gathered here, in this remarkable institution, to continue to change the shape of the world.

The creation of an entirely new paradigm for the governance of the world’s largest capital market is ours to grasp; I wish everyone here the joyous opportunity to revel in it.

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