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Money man Sam Zell’s reputation has been somewhat tarnished by the record speed bankrupty of the Tribune Co., the newspaper publisher he bought for $12 billion. But the self-made mogul made billions over the years in distressed real estate. His thoughts on the market are still worth hearing. Here’s what he said April 27 at the annual Milken Institute Global Conference in Los Angeles.
“We all drank too much Kool-Aid. Between 2003 and 2007, 50% of all commercial real estate traded. It ended up being over-leveraged. All cash buyers like Calpers played the leverage game instead of buying for cash. Very few who bought from 2003 to 2007 are above water. You can call it credit crunch, seller’s strike, buyer’s strike, either way you have more debt than you have value. We won’t see new equity players until the banks foreclose. It’s going to be a couple to three years before the ownership structure changes. Prices are down 25% to 30% on what’s sold. The reality is there ain’t much trading. One of the great lessons of Confucius is bankruptcy courts don’t respect maturities. That’s your General Growth (Properties) story. Sales occur when there are prospects. Tell me where the prospects are? I’m happy to buy a hotel when you can tell me the President will stop pissing on conventions. If owners have no equity, owners have no incentive to do anything. Who’s going to put up tenant improvement money? Publicly held REITs have gone down 65%, arguably too far. That’s real daily pricing. You have a lot of loans at floating rate, you don’t miss payments at 1-2%.”
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.