When Sam Zell makes a move, it might be time to pay attention
It’s hard to be in the field of commercial real estate and not know who Sam Zell is, and when you do, it’s hard to not pay attention to whether he is buying or selling.
Recently he’s not only made a big move, he explains his reasoning. During a recent interview with Bloomberg, Equity Group Investments founder Sam Zell discussed US Housing and the current state of the market. He said: “If you look at the world as I look at it, and you look at the pricing that is currently available in the commercial real estate market, its very hard not to be a seller, ” says Zell. He goes on to say that Equity Group Investments is simply executing their plan, by liquidating their “garden apartments”. The difference being that they did it all at once, rather than over 4-5 years as planned, because as Zell puts it, “the market could absorb.” Obviously Zell’s telling us there’s a lack of supply, and the demand for existing stock is pushing prices to what he considers relatively high levels. What’s interesting is the acceleration of his prior 4-5 year plan for slow liquidation.This move suggests Zell might not think the positive commercial real estate price run we’re on is sustainable for the next 5 years, or worse, that it will likely reverse before then.
Bloomberg pressed further, asking Zell about the downward trajectory in cap rates. Zell acknowledged that cap rates have been moving down, but said it was because costs have increased and (rent driven) value has been increasing. Zell further said he doesn’t buy real estate based on cap rates, saying there’s nothing more relevant than replacement costs. In today’s commercial real estate world, you can’t move an inch without hearing about cap rates, yet Sam Zell comes just short of saying he ignores them. He casually explained this position, adding that while value can be generated above replacement costs by cap rates, he called it a “suckers bet”. Zell went on to say that if you have the staying power, he “doesn’t know a better way to sleep at night than buying real estate for less than it costs someone to build it to compete with you.”
When looking back on Zell’s track record, it’s hard to suggest that he does anything based on a guess. In 2007 he was the seller of the largest real estate deal ever, when he sold Equity Office for $39 billion to Blackstone Group… just before the real estate market plummeted. And as noted by a 2013 article in Forbes, “when he saw Americans piling into China in 2010, Zell began selling his stakes in Chinese home builders and pivoted toward Brazil and Mexico”. So yet again, Zell’s actions could be sending a strong message that the commercial real estate market is peaking.
Top image via Felix Lipov