“Opportunistic Investing” Key to Today’s U.S. Real Estate Market
|Jorge Perez (left), chairman of The Related Group, joined industry titan Sam Zell, chairman and CEO of Equity Group Investments, in a conversation on Global Capital and Real Estate Investment Trends during the conference's keynote session|
“Sam Zell has been inventing and reinventing real estate for four decades, and understands the U.S. and global economies and how they interact,” said moderator Jorge Perez, chairman of The Related Group.
In a keynote session, “A Conversation on Global Capital and Real Estate Investment Trends,” at the University of Miami Real Estate Impact Conference Feb. 10, 2012, Zell spoke candidly about the economic challenges and current opportunities facing the real estate industry.
Zell began the session by putting real estate in context of the nation’s near-term prospects for economic growth. Noting the high levels of public and private debt, he said, “We have been playing a game of extend and pretend for years now. But to move forward, we have to clear the market. We have to look at the economy in a more realistic fashion. I think a true recovery depends on strengthening the confidence of the business community.”
The U.S. commercial real estate market, Zell asserted, is constipated by more than $2 trillion in outstanding debt. “Financial engineering is not the solution,” he said, adding that his slogan for lenders is: “Come clean by the end of 2013.”
Zell faults government policies that have slowed lenders’ ability to dispose of their residential foreclosures. “As a result, there are 4 to 5 million homes in purgatory where the owners are not making mortgage payments. That’s a massive moral hazard,” he added.
Overall, the U.S. real estate industry remains on shaky ground, he contended. New home construction has been at a standstill for the past five years with only 100,000 homes built in 2009. In the office market, he added, occupancy levels have slowly improved, largely because of little new construction, although most cities still have double-digit vacancies. “In the U.S., the average office space is 250 square feet per employee, but in Hong Kong it’s only 90 square feet,” he said. “That should tell you a lot about our market’s shadow inventory.”
Zell noted challenges in the retail real estate market as well. “Many of the lifestyle centers are now dying on the vine,” he said. “Then there are the power centers where three of the five big box retailers are now in bankruptcy. And those 300,000-square-foot enclosed malls where none of the tenants can afford to pay the operating costs? They are obsolete.”
Both Perez and Zell agreed that multifamily residential is the strongest U.S. real estate sector today. “When you look through a demographic lens, it’s hard to imagine that anything will outpace multifamily rentals in the next few years,” Zell said. “Young adults are no longer getting married in their early 20s. They are staying single longer and they want to live in 24/7 communities. That has changed demand, benefitting multifamily rentals and hurting the single-family suburban market.”
But Zell emphasized that investors have to have selective in finding promising opportunities. “Back in the 1990s, success or failure was all about scale,” he said. “Today, there are no broad themes. Opportunities are found by looking for the right spot or a one-off project with the right fundamentals. Until our country sorts out the financing mess, I don’t see how you can have any consistent or predictable theme.”
While Perez argued that government policies — especially support for low-income housing — have been historically important in getting U.S. families across the threshold of home ownership, Zell cites his experience in investing in emerging markets. “In Mexico and Brazil, I discovered you can build affordable housing today with very low default rates. Families there want to buy a 600-square-foot, two-bedroom home for about $22,000. But in the United States, that opportunity is long past. Today’s buyers would say such a starter home is much too small.”
At the end of the session, conference host Frances Aldrich Sevilla-Sacasa (AB ’77), executive advisor to the dean of the School of Business, asked both Perez and Zell if they had any advice for University of Miami real estate students. Zell emphasized the importance of using common sense, thinking rationally and creating individual career opportunities. Perez added, “Find your passion. Find a job and career where you feel good about what you do – that’s the key to success in any field.”