Sam Zell: NYC office market is being overbuilt

Equity Residential founder Sam Zell says supply and demand in the office market have fallen out of sync, as developers race to add square footage tenants don’t necessarily want or need.

“It was Confucius who said a builder will build when money is available. And demand, all the other factors, are always secondary,” Zell said, invoking a bit of Chinese philosophy on Bloomberg TV. But he said while he sees a lot of movement in the office space arena, he does not see a lot of growth. “I continue to see users becoming more and more clever in how they need less space, and therefore less demand,” he noted.

In New York, Zell said Related Companies [TRDataCustom] and Oxford Properties Group’s Hudson Yards mega-project will add 10 to 12 million square feet of office space. “I don’t see 10 to 12 million square feet of demand,” Zell said. (Meanwhile, tenants who are inking deals at Hudson Yards are leaving vacancies in Midtown, as The Real Deal recently noted.)

As for other segments of the market — single-family homes, multi-family and hotels — the numbers tell a similar story, according to Zell.

“The issue on housing starts has been for the last few years, the fact that there’s been very little ability to generate demand in what we call starter homes,” he said. “So I wouldn’t take any great comfort in those [higher] numbers if we’re building houses that people can’t afford.”

As for hotels, he said New York has added between 10 to 18 percent more hotel rooms in a two- to three-year span. “That’s got to have an impact on cash flows,” he said.

Equity recently lowered its recenue projections due to “deteriorating” apartment rental markets in New York and San Francisco. [Bloomberg] – E.B. Solomont