“No one has ever accused me of not being a realist,” Sam Zell told CNBC. The chairman of Equity Group Investments and of apartment mega-landlord Equity Residential was talking about the markets for office and apartment buildings in some major cities that have already peaked.
“Overall we’ve come off this extraordinary period of liquidity and this extraordinary period of low interest rates,” he said. “I think we’re unlikely to see a repeat of that going forward, and I think we’re going to see more supply in what had been pretty tight markets.”
And he has been selling. Back in 2007, he once again proved his sense of market timing. As the commercial property bubble was already teetering, he sold Equity Office Properties Trust to Blackstone for $23 billion, not including $16 billion in debt. Then prices crashed, and commercial property defaults hit the banks. As the dust was settling at the end of the Great Recession, he went on a shopping spree.
Now he’s selling again, unloading multifamily properties at peak prices on a massive scale just when a multi-year construction boom is flooding the market with new supply. Here are some nuggets:
Last October, Equity Residential sold 72 low- and mid-rise properties with over 23,000 apartments for $5.4 billion to Starwood Capital Group. With “pricing currently available in the commercial real estate market, it is very hard not to be a seller,” Zell said at the time.
Equity Residential still held 318 properties with nearly 86,000 apartments. In November, it put its Berkeley, CA, portfolio up for sale: eight buildings with 452 apartments and the entitlement rights to build a 205-unit complex.
In February, it inked a deal to sell its Woodland Park property with over 1,800 rent-stabilized apartments in East Palo Alto, CA, to an affiliate of Sand Hill Property Co. It had bought the property in 2011 at the bottom of the local real estate market. More deals are expected or are already transpiring.
So when Sam Zell speaks, our ears perk up.
On CNBC, Zell lashed out in his soft-spoken and well-balanced manner against the current zero-interest-rate environment in the US, and the fundamental damage it was doing — the man who so hugely benefited from it:
“In the most simplistic terminology, I would ask you the question, if something is free, is it valued? Is it appropriately risked?”
“I think when you talk about interest rates being close to zero for a long period of time, I’m very concerned about the fact that we have desensitized our business community to the cost of capital.”
“And we know that the cost of capital ain’t free,” he said. “Every time you defer facing up to the cost of capital, it’s going to catch up to you. That I think is the biggest concern.”
“We have distorted markets. Maybe we have bubbles.” Then, on second thought, he said, “I don’t even know what a bubble is, so I wouldn’t want to be the definer of it. But I think that we have too much intervention and not enough market movement in interest rates – and in other assets.”
“You know what the problem is? The problem is I think the Fed should have raised interest rates two years ago, and therefore today would be able to make a much more rational decision as to what to do. The problem is that they’ve so deferred reality for so long that I think they have a serious credibility problem if they don’t raise rates.”
Then he added another twist to this conundrum: “So now we’re talking about raising interest rates because of credibility and not because of economics.”
And the fear of losing “credibility” – what’s left of it after more than a year of flip-flopping on rates – may be why Fed heads are parading up and down in front of the media with suddenly invigorated rate-hike rhetoric. Meanwhile, Zell is selling, at peak prices, unloading assets at the top while he still can.
References to 2009 & the Global Financial Crisis keep popping up in reports on manufacturing, not only for the US but globally, because that’s how bad it has gotten.