David G. Marshall, CEO of Amerimar Realty in Philadelphia, has made a career of seeking out bitter lemons and turning them into sweet -- and profitable -- lemonade. Through the years, he has taken over distressed properties such as The Rittenhouse in Philadelphia, Pier 39 in San Francisco and Denver Place in Colorado and turned them into successful enterprises. Using this contrarian investment approach, Amerimar has accumulated a portfolio of hotels, offices, apartments and retail centers from New York to California. Marshall recently went to Shanghai as part of the Wharton Fellows program and came to the conclusion that what is happening in Chinese real estate ought to be a wake-up call for the U.S. market. Knowledge@Wharton spoke to Marshall about his visit to China and other issues.
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An edited transcript of the conversation follows:
Knowledge@Wharton: Let us begin with your visit to Shanghai. What did you learn about China, and why should that be a wake-up call for the U.S.?
Marshall: China is growing like crazy. Let's just take it from a real estate perspective. My wife and I had the opportunity to go to China in 1985. The tallest building in Shanghai was 19 stories high at that time. You could count bicycles by the jillions and cars by the handful.
In the last 10 years, not the last 22 years, Shanghai has built 2,000 high-rise buildings between 20 and 108 stories high -- one more spectacular than the next. We stayed on the fifty-ninth floor of the JW Marriott, which was the headquarters for our Wharton Fellows Conference. You can look in four directions as far as the eye can see and you see nothing but spectacular high-rises. At night it looks like Las Vegas: All the buildings are lit up, they look like rocket ships going off. It looks like the Fourth of July. It is absolutely incredible what they have accomplished.
And we, on the other hand, are arguing over Sarbanes-Oxley, stem cell research, an archaic tax code, social security and health care -- and I could go on and on. They're all very important issues, but we are paralyzed by these issues and we are not growing. It is reminiscent to me of what probably took place with Great Britain not watching the United States -- when the United States went flying by Great Britain. [China is] going to go flying by us and we're going to wake up one day and say, "Oh my God, look what we missed." That was my take away from China.
Knowledge@Wharton: Especially in Shanghai, the Pudong region has grown dramatically in the 10 ten years, as you have said. And if you go back 20 years, the change is even more dramatic, because then it was even more primitive -- there were just rice paddy fields at that time. As a real estate investor, what key lessons have you taken away about how that change came about in China?
Marshall: China has done a masterful job in planning -- to the extent that they have a museum, which is approximately the size of our Kimmel Center, dedicated to development. They have a scale model of [Shanghai] that has got to be [about] 100 feet in diameter. It is just unbelievable, with every building there. And whenever there's a new building, they go in [and add] the new one. They know what they're doing, and they have their eye on the ball. They are determined to get to a certain point in the next several years.
They're going to do the World Expo in 2011. They're determined to build nine new villages or cities within Shanghai. Don't hold me to these numbers -- I'm going by recollection -- 17 new expressways, six new subway lines. They have a 200-mile-an-hour levitating train that comes in from the airport, which they're going to be expanding. And when they say they are going to do it -- all you have to do is look and believe them. I mean, they are going to do it.
We have a democracy, which is wonderful and the best form of government, but maybe not the best form of government for everybody. This is because [China is] working under what is tantamount to a benevolent dictatorship, and if they want to do something, they just do it. We get bogged down.
I've been working, for example, on getting zoning for the expansion of a cancer research hospital here in Philadelphia. It's taken us several years -- and we still are not in the ground. I would bet you that in Shanghai this would have been completed already. We're still messing around with zoning.
You asked a question about Pudong and I digressed for a moment. They determined that they wanted to build the [east] side of the river, the Pudong side ... and they gave very advantageous tax benefits for companies locating in the Pudong area.
We had dinner at the Shangri-La Hotel, at the Jade Restaurant on the 38th Floor -- one of the finest meals I've ever had in my life. We were overlooking the river [and] they had fireworks on the boats. I mean, it's incredible -- all the boats are going up and down lit up.... It is just a very exciting place to be.
They determined that they wanted to get this built. In Pudong [there] is a building that Mr. [Minoru] Mori, I believe from Japan, is building. It's 108 stories high and it's going to be the tallest building in the world. It will be surpassed by what's going on in other places, but for the time being it will be the tallest building in the world. The Hyatt Regency is spectacular; they have an observation tower.... If they think about it, they just do it. It's absolutely incredible, and that's how they're doing it.
Knowledge@Wharton: In addition to the speed with which projects move forward in China, what are some other key differences between real estate development in China and the industry in the U.S.?
Marshall: China obviously has a tremendous demand push, which we don't have. They have companies coming in from all over the world that are very anxious to locate there -- to form joint ventures, to set up manufacturing facilities, financial facilities, whatever. So this demand push is really the reason why development is happening. But it is only happening because they want it to happen, and they are willing it to happen.
Knowledge@Wharton: We all know that real estate is a cyclical business, and when we see tremendous development taking place, there sometimes can be a boom followed by a bust. Knowledge@Wharton published an article some time ago about real estate in China, which pointed out that in cities like Beijing and Shanghai, home prices have been growing at 25% a year. This [growth] led some Wharton faculty and other experts who had been watching that market to wonder if there is a bubble. Did you see any signs of a bubble, and what might happen if it were to burst?
Marshall: I am not a "three day wonder" on the real estate market in Shanghai. We went through the General Motors plant ... we went through the Roche plant, we went through the Shanghai Pudong Bank, one of the major conglomerates, a media company. We met with CEIBS [China Europe International Business School], which is their business school.
We really did not -- and I did not -- get into the vacancy factors and the rent and such. So, I do not want to hold myself out as an expert in that. My reflections are [based on] what I observed as any visitor would see, but with a bent to real estate development.
Knowledge@Wharton: Would you invest in real estate in China -- and if you were to do so, what would your strategy be?
Marshall: I would not do it on my own. If I were to do it, I would probably do it with a Goldman Sachs-type of company that is over there and is entrenched and is very knowledgeable, very savvy and understands all of the pitfalls. It is not as clean as doing business in the United States. It's pretty well known that there are bribes: You've got to know the right people, and you've got to take care of the right people.
I have never in my career done anything that I don't want to read about in the morning paper the next day, and I'm not going to start now.... This is, to me, like showing up to play basketball and they hand you a football. The rules are different over there. If you don't know the rules, don't play the game. If you go to dribble a basketball and it's a football, it's going to go off shooting to the side. You're going to really find yourself in a mess. I'm not an investor on my own over there, but if I'm in with someone that I really trust that is knowledgeable, I would probably stick my toe in the water.
Knowledge@Wharton: Let's come back to the wake-up call. What do you think would be the right response?
Marshall: I think that it should be mandatory for every politician in federal government to go over there and see what's going on. I've talked to a number of them who have not seen it. It is incredible for me to see a country growing as fast as [China] -- which holds, at last count, $1.3 trillion of [U.S.] Treasury bonds -- where we are making decisions on how we're going to relate to them without having been there.
It should be a mission that they all [are required to go on].... It could be done in a few days. I'm interested in having them see the progress that's being made over there. I think that it's very naïve for us to have our congressmen arguing about how we're going to punish China for not letting the Yuan float; and how we're going to punish China for intellectual property rights. When [China is] sitting there with $1.3 trillion of our Treasury bonds, you're not going to punish anybody.
What you've got to do is try and work with them. We had a conversation with a bank, and we asked a question about intellectual property rights. The indication was very clear that they really don't care about intellectual property rights.... Their goals are to get one billion, 300-500 million people educated, clothed, housed and fed. Intellectual property rights are not on their radar screen and [won't] be.
We're trying to play a basketball game with a basketball, and they're trying to play a basketball game with a football. It's a different set of rules. We better realize that it's a different set of rules and that they're not going to play by our set of rules. They're holding a lot of the chips right now and they're holding more and more of the chips every day.
Knowledge@Wharton: Once the U.S. politicians go there and see for themselves the other side of the China story, as it were, what would you expect them to do? What concrete measures do you think can be taken to act upon the situation?
Marshall: Well, one of the things that we should do is understand our own political system and understand where our political system -- to me -- is problematic. I'm digressing from China a little bit, but I see a political system within the United States where you've got to be on the extreme left or the extreme right in order to get the nomination from your party for a primary.
Then, you try and coalesce to the center and you spend the next two years as congressman, or four years as president or six years as senator fighting a war in which you don't want to get anything done, because if you get something done, the other side will take the credit for it and you're more interested in getting elected than you are in doing the right thing. Those are the frustrating things that I see....
I certainly do not subscribe to us adopting their political system.... We had a guide who took us through the old city of Shanghai. The people who were living in the old city are given two choices when the city wants to build something: one is terrible, and the second choice is worse.
He explained it briefly by saying that if [the city] decides that they want you out of there, your first choice is that they will give you a new home 35 minutes out of down town, because you can't afford anything within the downtown area. You don't want to do that, because you're currently walking to work from your house and you're very happy. Well then, fine -- [the city will] appraise your house, and your house is worth about $700; they'll give you $700, and you'll fend for yourself.
Now, there's got to be a happy medium between just going in and running rough shod over people and trying to build a cancer research hospital that takes you years to get through zoning. That's really the crux of what my issue is. I'm not going to give you the answers. I'm saying [to] the politicians that [they] can come up with the answers. But let's focus on what our problems are. Our problems are that we're stymied; we can't develop things because we're constantly shooting ourselves in the foot.
We have a situation right here in Philadelphia, with the dredging of the Delaware River. New Jersey has said no to dredging, Pennsylvania said yes to dredging -- for the DRPA [Delaware River Port Authority]. And the response [on both sides] was that they were not going to meet. So they didn't meet ... for a year or a year and a half. And that was the answer.
Finally, Pennsylvania won, but they have the total cost of doing the dredging and they have the total responsibility for all of the environmental clean up. Hopefully the federal government will come in. But, we are fighting over the fact that we need 45 feet of depth in the Delaware River in order to bring in the big ships. New Jersey did not want to do it. And why they didn't want to do it... I'm not going to comment. But we can't accommodate one of the great ports of our country, because we don't have the depth to bring in the ships for all of the produce that's coming in from the rest of the world.
And so, we don't have an efficient way of dealing with our problems. Maybe [our politicians will] see that if Shanghai wants to build a port, they just build it. You wouldn't believe how many ships are in their port -- it looks like a traffic jam. And we are sitting here, messing around over a year, a year and a half, and [both sides] won't meet. They resolved it, but there's just got to be a better way.
Knowledge@Wharton: If you had your dream scenario for real estate, what would you like to see happen?
Marshall: It's not a dream scenario for real estate -- it's a dream scenario for America. This is not about me and it's not about what I want to do. I just want to wake up our political leaders to the fact that we have world dominance in so many areas that we are losing.... That's my goal -- not to be a real estate developer in China or for us to emulate their ways. It's just let's look at what the facts are.... The fact of the matter is, you can't have something like this going on without knowing about it. And you can't know about it unless you see it.
Knowledge@Wharton: What's the most important lesson you think America should be learning from what's happening in China?
Marshall: The world is passing us by and we are ignoring it. That is the most important lesson. I want us to understand that we can't deal with problems that we don't know about.
Knowledge@Wharton: David Marshall, thank you for joining us.