Weak economy, strong real estate?

Howard Lutnick, the chief executive who rebuilt the Cantor Fitzgerald investment firm after it lost more than 600 staff, including Lutnick's brother, in the 2001 attack on the World Trade Center, has invested much of the trading firm's profits into its publicly-traded financial brokerage affiliate, BGC Partners, and built it into one of the nation's leading commercial real estate dealmakers.

Lutnick was in Philadelphia this morning, talking to a crowd of brokers from the former Grubb & Ellis and the U.S. operations of multinational Newmark Knight Frank, now combined as BGC's Newmark Grubb Knight Frank (NGKF) commercial real estate arm. The firm rivals industry leaders Jones Lang LaSalle and CB Richard Ellis in its nationwide sweep, with an extra concentration in small markets and midsized companies.

Why does Lutnick's group care about Philadelphia, where office space and rentals are frozen at the levels of 10 and 20 years ago?

"We want to be in everything. You paint a painting, you don't leave the ears out," Barry Gosin, the longtime Newmark Knight head (and BGC board member) who Lutnick has appointed to head the combined company, told me. "Philadelphia is a significant market. Tenants here are also our clients elsewhere." The firm employ 60 local brokers, calling on Philadelphia law firms, colleges, insurers, real estate companies like Brandywine and Liberty, media companies like Comcast. 

Nationally, the firm advises corporate clients on how to consolidate their office and industrial space, what to buy and how to raise money. "The general answer is that they need less" overall, but more in growth or specialized markets, Lutnick, a Haverford College graduate (1983) who was right-hand man to the late Cantor Fitzgerald founder Bernard G. Cantor, told the crowd at the Union League. 

With its roots in investment trading, securities and sales, it's not surprising Lutnick's group is not only helping revive the market for mortgage-backed securities, but also developing specialized real estate investment products, including "property derivatives," contracts that will allow tenants in local markets to buy financial protection against rent increases -- and landlords to hedge against falling rents.

"This is classic Wall Street," Lutnick told the crowd. "We evaluate risk and evaluate prices like we do for bonds, like we do for sports teams" in Cantor's Nevada sports-betting business. which allows Las Vegas hotel guests and other Nevada residents and visitors to bet legally on pro sports games. 

Lutnick says he's going into markets where he can make money despite continued slow growth in the U.S. economy. "Interest rates are going to stay virtually nil for a longtime," he told the group. Proof? Check the inflated price of art, diamonds and gold. Investors are looking for something other than 'boring" bonds and traditional securities. "But in real estate, to have no interest rates is super:" People with equity to invest can borrow cheap to leverage big deals at bargain prices. 

He sounds blase' about 2 percent annual growth. "2 percent of (the U.S.) $16 trillion a year economy" still produces new opportunities comprable to, say, 8 percent yearly growth of China's $5 trillion economy. With "no real interest rates for years to come," it's a good time to be in real estate, he repeats.

Lutnick expects a long, hard fight over the federal budget. "We're just in the calm before the storm, "which will heat up as Congress considers whether to raise government borrowing limits next month. "The Republican House is going to say, 'You shoved it up our nose Dec. 31, now I'm not budging.' We are going to have a really difficult, strange time." How bad, can it get, really? he adds. "We can print the money... We can only default if we cross our arms and say, 'I'm not gonna pay.'"