CBRE announced last week its hire of Sam Zell. No, not the billionaire real estate investor, but the former vice president at Tel Aviv-based investment firm Buligo Capital Partners. After 12 years of working on the buy side, Zell will now oversee CBRE’s multifamily capital markets team in the Philadelphia area, a market that Zell believes has strong fundamentals.
Philadelphia has seen a significant increase in deliveries over the last five years. A recent market report from Marcus & Millichap found that 10,000 units have been added in Center City and suburban Norristown alone, with an expected 5,900 units still in the pipeline. Overall effective rents have seen a 3 percent year-over-year increase on the heels of 5.2 percent growth in 2018. (CBRE’s Philadelphia team closed $104.4 million in first half transactions.)
Zell, a member of Buligo’s team in the Americas, where he oversaw the acquisition, financing and divestment of roughly $2 billion in commercial and multifamily assets, spoke with The Real Deal this week about his decision to become a broker, his famous name and the potential that the City of Brotherly Love offers to multifamily investors in New York.
TRD: Let’s start with the obvious question — how often do you get confused with the other Sam Zell?
Sam Zell: My entire career. He’s one of the top guys in the business, so that happens all the time for sure. It would be like if I went into tech and my name was Steve Jobs. It’s a conversation starter, [so] I think it’s ultimately a good thing. Hopefully I can be a billionaire like him some day.
TRD: What prompted your decision to leave Buligo for CBRE?
SZ: I was with Beligo for a few years and basically started their U.S. shop. I built a nice multifamily portfolio for them here in the Northeast and Mid-Atlantic. I never thought of becoming a broker — I’ve been on the buy side since the market crashed in 2008. In the brokerage community, you don’t see a lot of people like me, so I thought it would be a good idea to shake things up and work with a team I’ve always respected. When you’re an acquisitions guy, you’re on airplanes all the time and moving around a lot. I love Philadelphia and this move enables me to be with my two young kids and wife.
TRD: What’s the state of Philadelphia’s multifamily market?
SZ: You have stability. You don’t have a lot of new supply and especially in the suburbs there is a lot of control on supply. It’s a very mature market and geographically is not far from New York, Washington, D.C., and areas with very low cap rates. This isn’t anything new, but I think I have seen [cap rates] increase historically. I think [out-of-town investors] are looking for new deals and this area, on a risk-adjusted basis, provides that.
TRD: How does the city compare to other markets?
SZ: D.C. and New York are highly compressed. In Philadelphia, you have a lot of institutional investors, but you also have “mom-and-pop” investors — very wealthy individuals — that hold on to real estate for a long time. But as the market has become more well-known from other gateway cities, like New York, it’s popularity has been growing.
As far as cap rates go, you’re looking at a reasonable rate of return versus your investment. This is a stable market, well-located, and it’s good on the supply side, too. And there are good restrictions on supply. You’re looking at a 4 or 5.5 [cap rate]. Just like everything else, there are riskier projects where you’ll get a 6, but generally it’s within that range. Downtown, obviously you have a lot of young and transient people. The educational institutions provide a good, stable base downtown. But if you’re looking at a nice apartment in the affluent suburb of, say, Montgomery County, risk-adjusted it could be even less risky and offer slightly higher cap rates.
TRD: Have you seen a spike in New York investment interest?
SZ: We’ve always had, historically, a strong amount of institutional interest from New York and D.C. It’s difficult to say the specific reasons for it, but generally, you’re just looking at similar risk and higher [capital expenditure in New York]. I don’t know if the rent control laws are specifically doing that.
TRD: Based on the fundamentals you cited — stability, growing rents and restrictions on construction — do you see Philadelphia becoming a more favorable investment opportunity for New York investors?
SZ: It’s hard to say. That’s like trying to predict what day is going to snow next year. You have a lot of uncertainty in politics and people are still asking how long this bull market will run. [But] in the last 12 to 20 months, [the market] has remained pretty steady. There is nothing weird or terrible about the direction things are going. You have good fundamentals as far as supply and demand. You don’t have a ton of big companies crowding the region, but you don’t have any that are really falling off. With the educational institutions, you have a constant flow [of people into the city].
All interviews are condensed and edited for style and clarity.