Sam Zell on the real estate cycle, interest rates and immigration
Celebrity real estate investor Sam Zell spoke at an industry meeting for real estate investment trusts on Wednesday.
While the REIT’s investment thesis has suffered a few setbacks recently, especially as of this post, Zell takes a long-term view. EQR Residential Equity,
, the company he founded in the 1960s, was one of the first real estate investment trusts of any category and is now part of the largest apartment category in the United States. He sees opportunities in this business cycle, but said no one, not even President Trump, can remove the natural ups and downs that characterize real estate and the economy.
Zell is known for his salty language and strong convictions, so the following remarks have been edited and condensed a bit to focus on real estate, the business cycle, and – just a little – politics.
What is the state of the real estate market today?
Today we see a multi-family market attracting new supplies for the first time, frankly, since before the Great Recession. We probably built 480 to 500,000 units last year, the last time we built that many units in a year was in 1971, when the multi-family housing market was developing from scratch. We have created a lot of supply.
In some urban markets, like New York, you see oversupply and falling rents, and maybe the creation of concessions, but basically relatively small in nature because there is no possibility of overwhelming an urban market. with an oversupply. This is not the case with suburban markets. I think over the next 12-18 months we’re going to see oversupply, especially in the suburban markets, which will make multi-family less financially attractive than it is. been so far.
Read: Apartment building boom is slowing – so rent is about to accelerate
What about retail?
The best description I can give you is a falling knife. The question is, if you have a falling knife, do you drop it to the ground and catch it bouncing? Do you keep it from falling and risk cutting your hand?
The answer is, we have a lot of square footage far beyond anyone else in the world … so we’re starting with an oversupply. We also start from obsolescence.
We have really big regional malls that continue to do well and small malls that continue to do well and everything else has suffered more than anyone from the Internet.
So some of the negative positions that people have taken I don’t think I support. It’s a rapidly changing part of the real estate world, and you need to figure out how to take advantage of it.
Interest rates are expected to continue to rise, perhaps at a slower pace than we think. I think the economy is strong and jobs are strong and unemployment is low. But the underemployment is at a level that is perhaps higher than it has ever been before, which means you have college graduates working as waitresses.
I think the economy is more fragile than people realize, and therefore I think capable of absorbing less escalating interest rates than at least for the moment seems to be the common expectation.
Read:Shopping centers are dying. There are not enough houses. Is there a solution ?
What about global risks?
You can look at something like Venezuela, which could totally implode. A total implosion of Venezuela would have a significant impact. First of all, they produce 2 million barrels (of oil) a day, they could go down to zero.
They have sent 600,000 immigrants to Colombia so far, they could send 2 million and destabilize Colombia, Ecuador and Brazil easily… There are a lot of these things… like the price of oil. US oil price: CLN8
is $ 70 today, whereas six or eight months ago it was $ 30. Every recession we have experienced since 1973 has been caused by the price of oil. What does it mean when the price of oil doubles in six to nine months?
… And what are the global opportunities?
Relatively speaking, and given the risks and inflation and everything, and overall demand and growth, Latin America has some very interesting characteristics compared to the rest of the world. Europe, you can take comfort in the stability of Europe, but at the same time how do you seriously invest in a part of the world where the net population is declining? Ultimately, you want to invest in demand.
How do you assess the performance of President Donald Trump?
President Trump probably shouldn’t get anything better than incomplete. There are a lot of things I would like to see done that haven’t been done. I would like to deactivate his Tweeter. I wish there was more presidential status attached to what he does …
At the start of 2016, I thought we were in the 8th round. Trump got elected, I think that led to extra innings. I don’t think Trump or anyone else has reversed the concept of cycles, and I would expect we would see both a business cycle and a housing cycle (correction) in the 24 to the next 36 months.
Right now our industry has seen a very significant increase in supply, and we will know what the demand is. More than anything, we need to recognize how unique America is.
Being the son of immigrants:
Every other word was “work harder, study harder, read more”. They had an extraordinary patriotism, an extraordinary conviction of what America was. This country was built on immigration and assimilation… it’s a shame that immigration has become a distraction. The greatness of this country lies in immigration. Immigrants self-select.
Also Read: Should America Get Big Again?