Legendary real estate investor Sam Zell has a true value instinct and is, in fact, nicknamed "The Grave Dancer" because he buys when everybody in the real estate world is getting killed. Zell appeared on an interview with Bloomberg TV on May 5. Interestingly, just like Warren Buffett (Trades, Portfolio), who held the Berkshire (BRK.A, Financial) (BRK.B, Financial) meeting this past weekend, he did not buy during the March selloff. He also discussed what he thinks about the current environment.
Despite six to seven weeks of lockdown, there’s been very little opportunity to do transactions. Zell is sitting and watching, so not much is happening. There’s been very little opportunity of price discovery since sellers are still thinking about prices available seven to eight weeks ago and buyers are seeing a different world and expect very different prices. Because of that disparity, nothing is happening.
We are also faced with an extreme level of uncertainty. How soon will anyone go to a mall? How will the reopening go?
There is no comparison. This is different from the former crises of 1974, 1981 and 1990, which were all financial-type crises. We have no frame of reference for this type of crisis. At the end of interview, Zell likened it to the Great Depression that began in 1929. Even during the Great Recession of 2007 to 2009, there were parts of the world that were fine. In this environment, the problem is universal. There is not anything to reference in history that we can go back to and see which way this cpuld go.
Zell expects baseball games, football games, dances and social gatherings of to be off for a while. He doesn’t see any scenario where, come Monday morning, life is back to normal. This has been an extraordinary shock to the world, to the U.S. and its culture.
He also has questions about airlines. How soon are you going to sit in the middle seat? How many airlines can survive if they can’t sell the middle seat? Ryanair (RYAAY) already announced it can’t survive if it can’t sell the middle seat. There are going to be adjustments. Maybe these seats are out, but prices for the remaining seats are going up.
When asked about rents paid by his tenants, he is very clear. In April, everyone paid rent. In May, rent collecting is running at a level that you would expect no difference versus any other time. Zell isn’t currently renting out lower-quality projects that are more likely to be impacted already. He also said they do offer adjustments to rent in the timing or “whatever.”
Zell believes the number one victim within real estate is going to be retail. There was already a lot of oversupply in retail and now it's taking a huge hit. Hospitality will be the second-biggest victim. There was already a lot of oversupply and this is going to make things worse to a great degree. A lot of hotels won’t be able to reopen. Everyone is focusing on when they will reopen. Nobody is focused on what it costs to do so. Zell anticipates that the costs will be too great for lots of businesses.
On the other end of the spectrum, multifamily is doing the best. Manufactured housing is doing terrific. Warehousing has been the flavor of the month over the past several years. Zell has a sense that this is going to reduce demand, but nothing like hotels or retail.
Before the virus, the argument with retail was that e-commerce would hit it. But retail always had the best corners. Defined as the best traffic. But if overall traffic diminishes, the best corners don’t sound as great. We are going to end up with a lot of retail space that is falling apart or close to that. It is going to take a long time.
Working from home is likely going to increase post-pandemic. Zell also said he got takeout from a Michelin star restaurant, which he’s never done before. Could that be a change in the future?
The investor said he had been buying oil and gas assets before Covid-19 hit. He recognizes there is a hope or trend toward sustainable fuels, but it is a long way from now. Combustion engines are still 95% of those being built, so the belief that oil and gas are going to disappear is very naive. Coal could see dramatic reductions in use within Zell’s lifetime, but he doesn’t think the same is true for other fossil fuels.
In a general sense, Zell sees this very much as the Great Depression. He thinks people will be permanently scarred 20 years from now over this pandemic experience.
Disclosure: Long Berkshire.
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