Sam Zell is a legend in the real estate investing world and the author of "Am I Being Too Subtle?" He chairs and owns big stakes in a few real estate investment trusts he has taken to market, like Equity Residential (EQR, Financial), Equity LifeStyle Properties (ELS, Financial), Equity Commonwealth (EQC, Financial) and Covanta Holding Corp. (CVA, Financial).
A couple of months ago, I wrote about his outlook for real estate, which was quite well received. So, when Zell appeared on the Milken Global Real Estate Outlook - view the full discussion below - I didn't hesistate to write about it again.
Unfortunately, Zell is still quite pessimistic about real estates' prospects. He thinks there's so much real estate under construction that a "tsunami of supply" is coming to market, which is why he sold $10 billion worth of buildings over the last couple of years.
There’s oversupply in every subtype of real estate, according to Zell. He's hiding in cash to ride out the tidal wave since oversupply has killed every other real estate cycle.
What supply?
Zell specifically calls out a number of New York developments:
- Hudson Yards in New York with 14 million square feet.
- Brookfield (BAM, Financial) with 5 million square feet.
- Penn Station.
Almost 20 million square feet of real estate right there, and Zell just doesn't see the demand.
It's not just offices, there's also an abundance of industrial real estate being built. Mostly warehouses, which everyone thinks they are going to rent out to Jeff Bezos. But what if Amazon (AMZN) doesn't rent the building?
Even in residential, he notices vacancy rates going up across his portfolio.
Now I'm constantly looking at the portfolios of the greatest investors on earth. Many, but not all, of them are currently quite bearish. The only difference here is Zell is an industry expert. What I like to do, however, is check their portfolios. Are they just talking bear market because it sounds smarter? Like they are taking into account risks? Or do they really believe it? To check whether Zell really means it, I looked into the portfolios of the public REITs he chairs.
Equity Residential, a REIT, is all residential- mostly apartments. It both buys and sells assets as you may expect from a vehicle chaired by a savvy capital allocator. It acquired a portfolio back in 2013, but ever since then it has been all sales. The REIT now has about $1.5 billion-plus in cash. With a ratio of 34%, debt to assets it is conservatively financed. Usually REITS are optimized for high returns, so this is clearly indicative of a bearish outlook.
Equity Lifestyle Properties leases land lots and its renters put RVs and the like on the lots. I guess because its tenants can dissapear, the REIT is more conservatively financed. It has only a smidge of debt at 20% of assets. It keeps a very long maturity profile, which exposes it to some interest rate risk. The debt has a very long maturity profile. I'd say it is very conservatively managed.
Equity Commonwealth turned out to exemplify Zell's thinking moste clearly. The REIT disposed of $5.9 billion in assets over the last four years. It now hoards a pile of $2.8 billion in cash.
Zell isn't just talking smack. He really acts on his beliefs that the outlook for the U.S. real estate market is bleak. His main concern being too much supply. It may take a year or two for his thesis to play out, but his felllow panelists did little to convince me otherwise. Zell's solution has been to slowly sell in these good times and build up liquidity to take advantage when the downturn finally arrives.
Disclosure: No positions.
