Real Estate Kingpin Sam Zell: Commercial Real Estate Is Overpriced

It is hard to justify going out and buying U.S. commercial real estate these days, according to billionaire chairman of Equity Group Investments Sam Zell.

Zell has embarked on a massive sell-off in the last two years of 124 real estate assets his company acquired when it took over Equity Commonwealth in a 2014 shareholder revolt.

"When we first took over, we had 156 assets in 50 markets in 35 states. Does that sound strategic? We prefer now to have the $2.1B in cash," Zell told NYU's Schack Institute of Real Estate's REIT symposium Thursday morning. "We were able to sell almost everything for a reasonable price."

Publicly traded real estate companies able to sell off assets are more valuable, he said. When asked what he was saving up his real estate investment trusts' large cash reserves for, he joked and said "Christmas," before explaining that he was waiting for the right time to make acquisitions, because he found the market challenging on the side of buyers.

"There is no reason you need to redeploy the assets," Zell said, although he is looking at a few opportunities. He said he is not alone, either. "Corporate America has more cash on its balance sheets as a percentage of assets than at any time before."

Zell hopes interest rates will go up; he compared current interest rates to playing basketball without a shot clock.

"There is no sense of urgency for investors to buy," Zell said. He said he did not believe there was an inverse correlation between interest rates going up and real estate values going down.

The current U.S. real estate market is different from what Zell has seen in the past because demand for real estate is so strong. Before the Great Recession from 1985 until 2005, the U.S. built 1 million single family homes a year. At the nadir of the recession, that number dropped to 400,000. Now that number is 600,000.

Yet, despite the new housing supply, occupancy rates have not changed much.

"You used to see occupancy go from 97% to 87% after this level of construction, but now it is 97% to 95%," Zell said. "We are benefiting from being under-built for quite a number of years."

In his wide-ranging conversation, Zell also had the chance to speak about his international investments. Zell said he was not more or less concerned about protectionism after the election of President Donald Trump, whom he supported.

The billionaire does not see Trump's campaign rhetoric, calling NAFTA "the worst trade deal ever," as a threat to his investments in Mexico.

"The reality is NAFTA was partially free-trade, partially foreign policy," Zell said. "The agreement achieved the foreign policy objectives but was never intended to be about fair free trade."

In fact, Trump's administration toned down harsh rhetoric about pulling out of NAFTA in a letter setting the parameters of his intended renegotiation of the agreement to members of Congress last week. 

Despite some heated rhetoric coming from the historic trading partners, Zell sees the current climate as not necessarily being bad for Mexico in the long run. Until recently, Mexican businesses depended heavily on the U.S. for most trade. Now Mexican business leaders are looking at other markets, and Zell believes that could be better for the country's development.

Zell's Equity International brought Homex, the largest homebuilding company in Mexico on the New York Stock Exchange, in 2004. At a University of San Diego real estate forum in 2014, Zell announced that he was investing in manufacturing facilities in Mexico. In 2016, a $120M facility partially financed by Zell, connecting Tijuana's International Airport with a crossing to Otay Mesa, Calif., started operations.

When asked about Brazil, where Zell once held a large stake in Gafisa, the country's largest homebuilder, Zell said he spent five years sending feelers out to Brazil before he made any investments there. The Chicago native said the country is a difficult place to do business because of the level of corruption.

"I was really shocked with the degree of the corruption, it was mostly Brazilian to Brazilian," Zell said.

Among the other places in the world that Zell has found difficulty in doing business have been India and China. He said business is conducted slowly in India, and he has faced difficulty investing there because the country lacks urgency. Zell's group is the largest investor in India's Samhi hotel chain, where he sunk $90M into the enterprise.

In China, Zell's group is an investor in a warehousing and logistics business.

Zell said the country has a lot of local wealth, making it harder for an outsider to invest. In a rueful joke, he pointed out how much savvier the country has gotten about outside investment.

"It was a great market at one time, when they needed our money," Zell said. "But now when they don't need our money, they don't know how to speak English."