It is an honor and a challenge to have been chosen to speak at your gala anniversary dinner. The real estate school at Johns Hopkins and its staff deserve congratulations for having survived and flourished for so long. I have been asked to talk about what your students should know five years from now. I am sure I was chosen for my long experience. I was a real estate consultant for 18 years, and have been the world's leading authority for 24 years.

I am interpreting this subject as discussing certain trends and issues I think will be important to students five years from now, that I believe they should think about now.

Charles Darwin once said, "It is not the strongest nor even the most intelligent species that will survive, but those most responsive to change." That is also true of people in the real estate profession. So I will discuss some important on-going changes.

The first set of changes involves two demographic forces within the American population.

The first demographic trend is that our population is growing much faster than that of any other large developed nation, and we cannot stop this growth. In the 1990s, our population rose by 32 million, or a CAGR of 1.24%. That was much faster than in the 1980s. Over 40% of this growth results from immigration from abroad.

In many growth regions, such as the Bay Area, most existing citizens do not want more growth. They recognize that continued growth brings multiple problems, such as rising traffic congestion. So they want to stop growth within their own communities and hope that doing so will slow growth in their entire region.

But this view is a delusion. No region can control its own growth rate through local actions. Its growth is determined by the region's basic traits, such as climate, location in the nation, topography, size, demographics, and past investments. Attempts by any one locality to stop its own growth may work, but only by shoving the growth to some other part of the region. That usually means pushing it farther out - aggravating the sprawl the policies are designed to stop.

We cannot stop this growth because it results from natural increase plus a major flow of poor immigrants from abroad. They will keep coming to benefit from our economy, and we need them as future additions to our labor force.

Yet nearly all our growth-related policies ignore all these realities. Such policies are based upon leaving all control over land-uses in the hands of localities, which cannot solve growth problems, since those problems are all regional. Yet few elected leaders are willing to consider region-wide solutions to these problems. Local citizens want to retain the power to control land-uses in each community so that they can protect the economic value of the equity in the homes they own.

Accommodating future growth, rather than vainly trying to stop it, is a key area where our profession must help our society respond wisely to change.

The second demographic trend crucial to real estate is the growth of minority groups.

Because of high birth rates and immigration, minority groups - especially Hispanics - will make up 80% of our total population growth in the next two decades. Yet Hispanics and African-Americans - the two largest minority groups - have incomes and skills about 30-40% below those of whites and Asians. If our society does not help them upgrade, they could drag down our whole society's economic life. By 2025, about half of all U.S. school children will be minorities.

Los Angeles exemplifies the challenge of this diversity. Its public schools contain about one million students who speak over 100 different languages. Persuading this immensely diverse population to share the basic values of our democracy is American society's major challenge in the 21st century.

The real estate profession itself is not very ethnically diverse and needs to better serve minority groups. This is especially important in Maryland, since the state's non-Hispanic white population actually declined in the 1990s. All your growth has been among your minorities, and will continue to be so.

One other trend closely related to demographics concerns traffic congestion. Rising congestion is the number one complaint of Americans about growth, and motivates many to oppose or try to slow down growth. But there is no cure for rising traffic congestion. It is a problem without any solution as long as our population keeps growing. We have been adding 1.2 vehicles to the vehicle population for every 1.0 person added to the human population since 1980. We are likely to continue 1 to 1.

Public transit cannot stop further expansion of auto ownership and use while our population grows by another 50 million persons by 2020. Transit now provides under 2.5% of all commuting outside New York City, and under 2% of all trips. Americans will not give up using their cars because doing so is faster, more convenient, more private, more comfortable, and often cheaper than transit.

Traffic congestion is the balancing mechanism we use so that we can pursue other goals we value more highly than speed. These include having a broad range of choices of where to live and work, living in low density settlements, all working during the same hours so we can interact efficiently, doing multiple errands on a single trip, and separating ourselves spatially from poorer people.

So get yourself an air-conditioned car with a stereo radio, CD player, telephone, fax machine, and a microwave oven, and commute with someone you really like!

The next major set of trends concerns globalization vs. localization. Contrary to a great many other American economic activities, real estate has always been highly localized because each property is attached to a specific spot on the earth. You cannot import or export office buildings or shopping centers serving the U.S. population.

However, we must distinguish the financing of real property from its operation and management. Because money is fungible and can flow anywhere, the financing of real estate can be globalized - or at least de-localized. And that is already being done.

There are major economies of scale in financing - mainly tapping sources of capital from all over the world, using many instruments - including real estate investment trust shares. This is allowing large-scale corporations like Equity Office REIT to come into being in real estate markets mainly through the financing side.

But economies of scale in property marketing and management are not nearly as great, except in hotel and retail mall chains. Beyond the regional level, such economies are overshadowed by the basically local nature of the product itself. Local knowledge of markets is much more critical than in financing. Except for regional malls, no REIT form has any very large share of total operations, and small-scale local operators are still important forces in every regional market.

This bifurcation of functions between global and local is further emphasized by the rising difficulty of getting permission from local authorities to build anything. They are increasingly pressured by citizens to stop development. So local political contacts and knowledge, and long build-ups of relationships with citizens groups, are more and more important in getting permission to develop anything. That emphasizes local knowledge.

Although bigger homebuilders are capturing more of the total homebuilding market, there are still market niches for thousands of smaller-scale operators. That is true for other types of property as well, except for those which require immense investments, such as regional malls or major mixed-use projects.

The next major trend is the changing overall importance of real estate in the nation's economic and social life. Real estate is both tremendously important absolutely, and declining in importance relatively. Yet most practitioners do not realize this is happening.

Real estate is the second largest form of wealth in American society - second only to stocks, because of the big run-up in stock prices since 1990. Real estate provides the locations for all essential actions in society - from raising families to being the U.S. President, from farms to skyscrapers and factories and shopping malls. Therefore, real estate is a crucial ingredient in the efficient operation of society's economy.

Real estate also provides much of the tax base for our public education system. It provides jobs for millions of workers from lumberjacks to bankers. It is the main form of wealth for most individual families who own their own homes. It is used by the Federal Reserve as a device for helping to mitigate business cycles.

Moreover, the long-established strategy for building up wealth by borrowing a lot of money preferably on a non-recourse basis, building and operating properties that last for many years, paying off the debt from revenues from the properties, using overall price inflation to increase equity, and eventually either refinancing or selling at a large capital gain - that strategy still works and still produces major wealth for many families.

Yet real estate is also an established, mature industry that cannot maintain the rapid growth that many high-tech industries will exhibit. Real estate activities will grow at about the same rate as GDP. That is why REITs are not growth stocks, but income-oriented stocks. Real properties have not increased in value nearly as fast as stocks in the past two decades - even taking into account the recent fall in stock values.

Compared to values in 1990, the S & P 500 has risen 216% and even the NASDAQ index is up 258%, but average values of the fastest-rising type of real property - apartments - are far less than 100% above their levels in 1990.

This is partly because as society evolves technologically, older sectors become mature and relatively stagnant and decline in relative importance. Farming declined re manufacturing; manufacturing declined re services; and real estate has now declined in relative importance re high-tech industries. That is inevitable.

This does not mean the absolute importance of real estate has diminished, for all the reasons I just stated. Our industry will always be a vital part of American life.

A crucial aspect of the industry is the nature of real estate development - a greatly misunderstood activity. The function of developers in society is to overcome the inertia of the world, which resists nearly all significant change because change is upsetting. Developers persuade society to accept structural innovations that will prove beneficial.

Developers are risk-takers and visionaries, and therefore earn large returns for taking on high risks. They also must have optimistic, aggressive personalities to succeed in creating change. Those who succeed become wealthy and are maligned by people with less wealth who think developers exploit them.

Yet most of the major innovations in the physical structure of society have been started by developers who took risks - from tract houses and shopping malls to power centers and downtown housing and mixed-use new communities.

The next major trend results from a combination of rising citizen participation in land-use policies and the continued presence of very poor households in American life. We need such households because our economy has to have many low-wage worker to operate. These households need decent shelter they can afford, but more affluent citizens - especially homeowners - oppose the creation of such shelter anywhere near them.

Our society has always had to provide shelter for millions of people who cannot afford to live in dwellings that meet the middle-class quality standards of most Americans. These poor citizens, many of whom are recent immigrants, must live doubled-up in substandard dwellings because that is all they can afford, unless they receive subsidies. We will neither provide subsidies for all such households, nor permit the construction of new housing for them at lower quality standards than the middle class prefers.

So America has always had to resort to slum dwellings - mainly old, over- crowded ones - to house millions of poor citizens. We still do. But we are not willing to admit this or confront its policy implications. An example is enforcing building codes differentially in poor and wealthy areas, as all big cities must do.

Recent greater emphasis upon citizen participation in planning new projects has raised the difficulty of getting permission to change anything because of massive opposition of NIMBYs. There is an implicit axiom in most suburban local governments that nothing should be done that might reduce the home values of all homeowning citizens. That is because homeowners dominate most local governments politically. But those citizens believe any housing less costly than their own will reduce their home values. So nearly every suburb zones out the possibility of building truly low-cost new housing for the poor. That forces poor people to live mainly in older, central areas.

But such concentrated poverty neighborhoods breed highly undesirable conditions like high crime rates and underperforming schools. These areas are mainly inhabited by poor minorities because of racial segregation in housing and high levels of poverty among minorities. Yet minorities are going to be an increasing part of our society and we need to upgrade their abilities, as I pointed out earlier.

These conditions are causing an increasing shortage of housing affordable to the poor across the nation - especially in high immigration areas like California and Florida. Yet there is little political support for creating more affordable housing in suburban areas.

This is an increasingly serious problem that large and growing regions must deal with in some way. It should concern the entire real estate profession. We cannot expect to make use of low-wage workers without creating adequate shelter for them. Yet suburban citizens and governments will not resolve this issue without pressure from us.

This leads me to the last subjects I want to discuss: ethics and social responsibility.

Since September 11, 2001, there has been a huge upsurge in feelings of national unity and compassion. But these feelings should not be left as vague generalized sentiments. Rather, they should be translated into responsible personal behavior in each of our fields of endeavor, including business. Real estate is a perfect example.

Behaving ethically sometimes requires personal sacrifices, yet it is the right thing to do. When Mayor Richard J. Daley hired my firm to reform the Cook County Assessor's office back in 1971, it was my responsibility to do the job right. He even put his arm around my shoulder and said, "Clean it up, even if you have to fire everyone there."

But when cleaning it up required doubling the assessed values of people's homes in his own ward, he became furious. He demanded that I not do that, but I did it anyway because it was the ethical and legal way to act. As a result, he refused to give my firm any more business, even though the City had been our largest client. That cost me dearly and eventually led to my leaving the firm. But I don't regret it.

This example also shows that all too many politicians will do what is expedient for getting re-elected rather than what is right. You must be careful in dealing with them not to get yourself pressured into undertaking unethical behavior.

Social responsibility involves trying to take leadership positions in solving difficult problems. An example is the problem of affordable housing and its being excluded from thousands of suburbs by deliberate policies to "protect" homeowners by forcing the poor workers they need to serve them to live in overcrowded slums.

The real estate industry has a social responsibility to find creative solutions to this problem. And that means YOU, not someone else. You will all soon personally encounter situations where this problem affects your own neighborhood. I urge you to promote a more inclusionary outcome than seems evident now. Montgomery Co. has been a leader in this regard, but more needs to be done. If you act courageously, the results may surprise you and improve your community.

In conclusion, I have discussed a number of trends and issues that I believe will be important to you and your real estate careers. All of them will test your responsiveness to change, including some change you may not like but must accept. All of them will also challenge you to go beyond routine methods and purely self-serving behavior.

I hope your visionary and entrepreneurial reactions to these forces will provide you with both material and psychological rewards, as well as enhancing society's physical and economic landscapes. I am confident that you will be up to that challenge.