Sam Zell sold Equity Office Properties to Backstone Group in 2007 at the top of the market.
It’s interesting to watch the apartment trends by 2015 Zell’s REIT Equity Residential was selling 23,300 units in South Florida, Denver, DC, Seattle and the Inland Empire (California) for $5.4 billion to Starwood Capital Group.
Rent growth in these areas have surpassed 4% over the past 5 years. The portfolio is mostly class B surface-parking, two to four-story, walk-up, garden-style properties with high Walk Scores.
In 2020, Zell predicts that the apartment market will become a buyer’s market in the near future. Zell through REIT Equity Residential owns more than 300 properties and more than 77,000 doors nationwide. From his experience, Zell is not making major acquisitions right now because he does not think that pricing has adjusted to the new reality post-covid.
When he started as a real estate investors, Zell focused on smaller emerging markets where there was less sophisticated and institutional investors. As his reputation and assets grew, he now focuses more on urban investments in NYC and San Francisco.
According to Zell, apartment investments will remain strong even though he predicts we go through something like the 1930s Great Depression. Zell believes that Retail, Hospitality and Industrial will be the asset classes negatively affected by covid.
For retail, he expects retail spaces converted to offices, warehouses and/or distribution centers. For hospitality, Zell sees an oversupply of hotel room inventory and general decline in prices. Finally, industrial has been hot with an oversupply in inventory including low barriers to entry.
Zell in interviews has articulated that no one can take away the market cycles although Trump “has added extra innings.”
In 2018, 500,000 new apartment units were created and this is the greatest increase in supply since 1971. In suburban markets, apartments are more likely to have an excess or oversupply in inventory. Zell is expecting a market correction in the multifamily sector “anytime now” because inventory rates are too high.
The reason why Sam Zell is the greatest multifamily investors is because he knows when to sit on the sidelines and investment in other things such as manufacturing and health care in the 1980s. He literally sat out the 1980s for investing in multifamily.
In the 1970s, Zell bought distressed multi-family in a massive arbitrage. He took on $3 billion in debt at 6% when inflation was at 9%. He didn’t like the trend in the 1980s away from 25-year fixed-rate loans and emphasis on short -term variable loans. Zell now states that the only mistake he made in the 1980s was not selling anything.
If you follow Zell closely, they don’t invest into development deals. They may acquire stabilized development deals but they don’t do new construction.
1987 saw a massive liquidation squeeze where banks were asking for significant pay downs of existing loans during a time when properties could not sell. Accounting standards were made super stringent as a “mark to market” and the underlying property had to be curried on the books at the current market value. In addition, workouts with lenders vanished.
Zell predicts a massive consolidation. He compares the real estate market in 2020 to the auto market in 1920. There were 200 auto companies in 1920 and in the 1930s there were only 3 remaining.
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