Reclusive Steve Roth speaks out at Insignia/ESG breakfast.

"Scale does matter," declared Steve Roth at an Insignia/ESG State of the Market breakfast briefing on October 6th. The reclusive Vornado chairman revealed he'd rather buy than build; thinks real estate prices went too high and his stock too low; dislikes retail; and now invests in buildings that represent businesses.

"We try very hard to force ourselves, and challenge ourselves mentally, to make changes in our business," he said.

As a large public company, they have to do big deals, and $5 million, $10 million and $30 million deals don't count. And by the way, don't come to him with leasing deals; bring those to partner Bernard Mendik.

"We have to do large stuff, and is another thing we love about Manhattan real estate," Roth said, referring to the numerous large transactions that can be made on the island. Of course, he revealed, they'd been the third highest bidder on several transactions, but had also realized it was time to "get out of town," because the pace of the recent auction process meant executing contracts and checks and sending them in with the bid.

"I am honored to say we haven't bought a building in six months," he said, stressing that the real estate investment trust is not out of money. "We have $1 billion, and when prices are right, we will buy more buildings."

Roth declined to discuss the future of the company's 59th and Lexington Avenue Alexander's site, where the jumble of old buildings is being demolished.

While Vornado started out as the Two Guys retail chain, which Roth turned into the Vornado real estate company, he is no longer a believer in retail, but in buying buildings that represent businesses.

"We prefer to own businesses rather than individual assets. This is a lesson we learned with cold storage," he said.

From a $4 million investment, Vornado now owns 30 percent of the refrigerating capacity in the U.S., and that means there's a 90 percent chance your Thanksgiving turkey will have passed through a Vornado building.

That's also why they purchased the Kennedy's Chicago Merchandise Mart, where the contract furniture business is based and 65 percent of all office furniture orders are written.

"My feeling is the retail is mature, the retailers are not differentiated, and they sell the same products," he said, predicting it will be the product type to "get murdered" in the next real estate recession.

And Roth doesn't speak too highly of the office building business, which "generally speaking, stinks," and is "capital intensive."

Still, they entered the New York City market because in figuring a 10-year cycle basis, "in three years out of 10 it's the best business in the world." Of course, timing counts, and Roth said they'd rather "get in early and get out early."

Vornado spent an average of $30 a foot buying 12 million square feet of office space through the Mendik and other portfolios, but this is a $40 market, he stressed, and they have a projected internal growth of $130 million to $140 million a year just in lease rollovers.

"I would rather have. a low break-even and make a lot of money at $30 a foot," he said. "We would rather buy than build - we're economically driven. If we can buy for $175 and it costs $450 a foot to create, we want to own the $175 a foot."

For the first time, real estate is not causing the problem, he observed, explaining that public stock and securities are volatile and fluctuate, and sometimes "in unpredictable ways."

"Our stock started to dive when, six or even seven months ago, business had never been better," Roth recalled. "The stock market is a predictor of the future, but it's volatile, and there is sometimes a huge disconnect."

Still, he says they believe there is New York, and "then there is the rest of the world." And while New York is the Capital of the World, it still has a scarcity of space.

When Insignia's founder Andrew Farkas needed the capital to start the company, he obtained his $5 million in seed money from Roth and Edward S. Gordon. In the transaction, just completed in early October, Farkas sold the residential portfolio and management to AIMCO for $1 billion and now retains the Insignia/ESG family of companies, along with the New York City residential management businesses, and the Realty One single-family home business.

At various times during his more than half hour talk, Roth ribbed Farkas, transactional competitor Steven Witkoff, and Mendik, who joined forces with Vornado with his portfolio of Manhattan properties.

"I love you Bernie," Roth declared at one point, looking across the room into the eyes of his partner, who had already confided he was considering resigning, which Mendik did a week after this event.