Sam Zell Sees Little Damage, Quick Recovery, in Commercial Real Estate — with Mortgage Backed Securities Leading the Way

Billionaire real estate investor Sam Zell has never been shy about expressing his views or going against majority opinion. 

He has embraced the description of himself as a “contrarian” — and not only in regard to investment strategies.  

While just about everyone else has been publicly sympathetic to the many thousands of people who’ve been forced into or close to foreclosure, Zell told an audience last week at the Milken Institute Global Conference in Los Angeles that “What this country needs is a cleansing” in the residential market. “We need to clear out all of those people who should never have been in houses in the first place and who for sure shouldn’t be getting sympathy,” Zell said.

The blame for the current housing slump, according to Zell, isn’t the financial industry’s subprime mortgage practices or overbuilding by contractors.  Rather, the blame belongs to the federal government’s policy of “encouraging homeownership at any cost.” The rise in the U.S. homeownership rate from 63% to 69% during the boom was totally unjustified, Zell said, other than by “the political impetus of, ‘Let’s put more people into homes they can’t afford.'”

Zell, of course, is perhaps the nation’s largest apartment owner. 

As Chairman of Equity Group Investments, Zell controls Equity Residential, the largest publicly traded owner, operator and developer of multifamily housing in the United States with nearly 160,000 apartments in 25 states and the District of Columbia.  And, as we’ve noted in an earlier post, the apartment industry has adamantly opposed federal aid to homeowners facing foreclosure and blamed the housing crisis on what it has called the “misguided” national policy of “home ownership at any cost.”

Zell also went against majority opinion this week when he asserted that the real estate crisis was just about ended, as least for commercial properties, and mortgage-backed securities would be leading the comeback. 

According to Zell, institutional investors are beginning to return to the market for mortgage-backed securities to finance commercial real estate deals and new construction. “I believe the overall market has already started to ease,” Zell said. “Is it in large volumes? No. Is it the first natural step in the evolution? Yes.”

In particular, Zell did not see real damage being done to office properties.  His former company, Equity Office, which he sold to The Blackstone Group in February 2007 for $39 billion, is the largest owner of office buildings in the United States. 

“I’m sure there’s going to be some casualties, particularly in what I would call ex-urban, the glass-block commodity office building,” he said. “I don’t think there is going to be any casualties in Manhattan. I don’t think there’s going to be any casualties in any of the first-class office space around the country. The commercial real estate market is going to do terrific no matter what the economy does, short of a depression.”

On this point, we think he’s probably right.

We wouldn’t want to argue with a real estate investor who has been smart enough to become number 164 on Forbes Magazine’s list of the richest people in the world.

On the other hand, Zell told an audience at the Wharton School last September that the turmoil in the financial markets was only an “emotional reaction” that would soon stabilize.

He was wrong on that one.

And he does own the Cubs.

 

 

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