"America's Landlord" Talks About September 11


If anyone can rightly claim to be America's landlord, it's Samuel Zell. The billionaire investor is chairman of Equity Office Properties Trust, which, together with partners, owns 380 buildings containing 99 million square feet of floor space. Other than Uncle Sam, it is the largest owner of office space in the nation. Zell also is chairman of Equity Residential Properties Trust, which owns all or part of more than 1,000 properties with 226,150 apartment units, as well as Manufactured Home Communities Inc., which has 50,000 sites in trailer parks around the U.S.

This may not be such a good time to be America's landlord, however. While the housing market had been holding up surprisingly well through late summer, the office sector had been declining even before the September 11 terrorist attacks that destroyed the World Trade Center and part of the Pentagon. Now, virtually the entire real estate industry is paralyzed. Developers are canceling projects. Corporate tenants are backing out of leases. Families are staying put. Interest rates may be at 40-year lows, but few people are in a spending mood.

Zell remains self-assured, as always. Real estate is notoriously cyclical, and at age 60, Zell has been through bleak times before. And the Chicago executive has a celebrated knack for using downturns to his advantage, trolling the bottom for bargains when sellers are panicked and competing bidders are few. Then, assuming he has done his due diligence and contingency planning, he can just sit back and wait as the inevitable rebound lifts the values of his new properties.

There's another reason why Zell isn't anxious: His holdings stretch well beyond real estate. He is also chairman of an additional half-dozen companies, from American Classic Voyages Co., which operates cruise ships in Hawaii, to Anixter International Inc., a distributor of electrical and cable products. He's also chairman of Equity Group Investments LLC, a partnership through which he can dabble in still other ventures.

Sitting in his eighth-floor office in a 1920s building he owns in Chicago's West Loop, Zell talked about investing in today's dour economy with BusinessWeek Correspondent Michael Arndt. Here are edited excerpts of their conversation.

Q: You've got a pretty good record of timing the market, of knowing when to jump in and buy things when nobody else will. What are you doing right now?

A: In the early '90s, I thought that the opportunity was to take over and run companies. And we did so. At this time, to us the junk bond market looks the most inefficiently priced. And we've spent a lot of time in the last nine months investing and researching different opportunities in the high-yield market.

Q: Does your interest become even more intense now that the economy is really hitting the brakes?

A: We have been operating under the assumption that the economy was going to suffer, and it has. Obviously, September 11 makes it worse, although maybe worse only short-term. The level of stimulation is such that it would be hard for me to imagine that it won't result in a recovering economy in the third and fourth quarter of next year.

Q: You really think it will take that long?

A: Yes.

Q: Why such a long lag time? The Fed started cutting rates last January. That's already nine months of stimulus.

A: But the Fed isn't the one who held the excess inventories. And I think in an environment like ours, where a much higher proportion of gross domestic product is services and high-tech [related], that interest-rate stimulation is less effective than it was in what I call the hard-asset era. Then, a lowering of interest rates might have tipped you toward buying the next machine. Our world isn't about buying machines anymore. Or certainly a significant portion of our world isn't.

Q: But lower rates generally spur the real estate market, don't they? What do you see happening in residential activity?

A: I don't know enough to answer your question. It sure looks like house sales have slowed down, despite lower costs. Refinancings have been spurred. But in terms of commercial building, it has had no effect. If this had happened 10 years ago, the impact would have been very significant because it was very overleveraged. But in today's environment, where the major real estate businesses are significantly underleveraged, the impact is nil.

Q: What about the effect of the terrorist attack on commercial real estate?

A: To a large extent, everybody is reassessing whatever they were committed to, as to whether they should go forward, want to go forward, can go forward. But I think September 11 wasn't about bombing a couple of office buildings. It was bombing something symbolic. And I don't see any significant change in the way we house our businesses or anything like that going forward.

Q: That's interesting because there are many people who theorize that clients might be less likely to move into a high-rise, particularly a trophy building, because it might be another target.

A: At most, I could see companies looking to decentralize somewhat, not having all executives in one building as a precaution. But the idea of moving into bucolic campuses -- I think an awful lot of companies have already tried that. And for some reason, an awful lot of these campuses are for sale.

Q: So you don't think this will make it harder to rent space, for instance, in the Sears Tower?

A: I don't think so.

Q: Do you see a building boom in New York to make up for the lost space?

A: I would be surprised. I think that some of that space is replaceable, but I'm not sure demand will ever be there for all of it.

Q: Why not?

A: I think that any time there's this kind of change, some of the firms or some of the parts of the firms that are now in New Jersey or somewhere else are going to enjoy lower costs there and stay. And whereas they might never have moved before, once they've moved, I don't know whether they're going to move back. But I'm just speculating.

Q: If a big trophy building were to become available and the price were right, would you buy it?

A: Absolutely. No hesitancy whatsoever.

Q: You've been in many businesses over the years. Do you see yourself going into new lines of business today?

A: I have no idea. I've always defined myself as a professional opportunist. I don't think that has changed.

Q: Junk-bond king?

A: Oh, hardly. I just think that at the moment that is the most inefficiently priced market, and that means there are opportunities to invest capital at attractive rates. And in some cases gain control of companies.

Q: Would that be your purpose in doing this -- to gain control of companies?

A: Not necessarily, but if you play the game, you've got to be prepared to go both ways. Certainly, we've run a lot of companies in a lot of different industries. So we're a comfortable investor if we're called upon to be more than just an investor. And I suppose you wouldn't be surprised to find out we're doing something like that today. But if I was, it would certainly be confidential. But it is safe to say, we're busy.

Q: Is it easier to make money in a bad time than a good time?

A: I think a lot of it has to do with your mental set. There are a lot of people who made money in dot-com land, by buying low and selling high. That certainly was easy money. Yet for somebody like me, I wasn't comfortable buying something on the supposition that there must be somebody who would buy it from me at a higher price. So if you have a value approach, it's much easier to make money in tough times than in ebullient times. To me, everything comes down to basic assumptions, staying power, and then being able to exercise when it's time to exercise.


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