Had Equity Residential’s Samuel Zell known that Lehman Brothers would accept a fixed price for Archstone’s sprawling apartment building portfolio, he would have bought the whole company outright, he told participants yesterday at a real estate investment trust symposium hosted by New York University’s Schack Institute of Real Estate.
“The fixed price removes a lot of uncertainty from the deal,” said Zell, looking rakish in a grey blazer and jeans, amidst a suit-clad crowd at the Pierre, a swank Central Park-facing hotel at 2 East 61st Street.
In November of last year, Zell and AvalonBay Communities, a Washington, D.C.-based REIT, agreed to pay roughly $6.5 billion in cash and stock for the portfolio, which contained just under 58,000 apartment units scattered around the Northeast. Zell said he wasn’t aware that Lehman would agree to a fixed price — rather than a fair market value deal — and if he had known that up front, he would have gone solo.
Still, AvalonBay was a stellar partner on the deal, Zell said.
“To do a deal of that size with such limited friction is pretty extraordinary,” he said.
In New York City, Equity Residential is building 400 Park Avenue South, a 40-story condominium and rental apartment tower in partnership with Toll Brothers. But ground-up development — given its inherent risk — is only a small part of the publicly traded company’s arsenal, Zell said, noting that the firm built only “5 percent” of its portfolio, valued at $35 billion.
“We’re going to find out in the next three or four years what happens when you’re in the middle of construction and inflation starts to go up,” he said.
When asked about the housing market, Zell said that elevated home ownership rates had historically preceded turmoil.
“Every time we’ve got into a crisis in this country, the housing rate has hovered over 62 percent,” he said. “It was 69 percent recently, now it’s at 65.5 percent.”
But, he added, the rates would eventually reside in the “50-something” range as people opted for a different lifestyle.
“Millenials have destroyed the shibboleth that housing [rates] only goes up,” he said.
Zell was the final speaker at the conference, which included a roster of industry bigwigs. Michael Fascitelli, outgoing chief executive officer of Vornado Realty Trust, spoke in a morning panel about doing deals in uncertain markets; Michael Graziano, global co-head of real estate at Goldman Sachs discussed the intricacies of financing REIT deals; Pershing Square Capital CEO William Ackman and Jonathan Gray of Blackstone talked about REIT conversions, foreclosures and the rise of single-family home REITs; and AvalonBay CEO Timothy Naughton shared tips about hot investment sectors and foreign expansion.
The conference was rife with zingers, with Ackman and Zell in especially fine form.
“Go to medical school,” Zell quipped, when a student asked for advice for budding real estate players.
“Most people don’t wash their rental cars,” Ackman said, when he was asked about the risks of a single-family rental portfolio, implying that maintenance was a challenge with single-family rental homes.
But Zell, in one of the final questions of the day, took the cake. When asked how he was preparing for the eventual unwinding of quantitative easing — the Federal Reserve’s policy of buying financial assets to lower interest rates — he said, only half in jest: “I’m getting under my bed. I suggest you do the same.”