Sam Zell on Today's CRE Environment

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As possibly the most successful real estate investor around today, Sam Zell is a great source to listen to.  I found some notes from his latest conference presentation, and the link is below.  Here are a few parts:

  • Sam thinks the future is in high rise versus low rise, changing the company and upgrading his portfolio. Suburbs sold, focus is on 7 core markets.  
  • Baseball adage – in the 8th inning on commercial real estate.
  • Once you get to the 9th inning – value dramatically dictated by quality of assets. High quality assets with minor alterations but the marginal items in historical pricing is where you will see an impact in value.
  • The disparity between A and B class properties will increase.
  • Enormous amounts of liquidity and financing at attractive rates = lots of competition which is destructive.

Sam Zell Comments at Invest for Kids Chicago Conference 

I agree with his solutions if we're near the end of the cycle.  Demand for income assets is higher because lending is easy.  When the cycle turns down, only the best multifamily  assets will sell easily.  Otherwise you need to be prepared to buy and hold, meaning you need longer terms on loans and stable assets in your portfolio.

People chasing after C-class properties at compressed cap rates will get hurt, as rising rents and easy credit mean more people will become homeowners.  Maybe C-class tenants can't afford their own homes, but B-class tenants can, and higher vacancy rates and lack of rent increases will trickle down into the C-class.

The viewpoint about millennials not wanting to own homes is wrong - buying homes and starting families was just delayed due to a large recession at the beginning of their careers. 

What do you think? 

Sam Zell has agreed to sell more than 23,000 apartments controlled by his real-estate company, Equity Residential, for $5.4 billion to Starwood Capital Group, the companies said.

I saw the above news a couple of weeks ago but forgot to post it.  It looks like Sam is putting his money where his mouth is.