An Angry Bend Bitch
Real estate mogul billionaire Sam Zell looked past 2010 and made predictions for 2011 and — in the case of new development — laid out a forecast all the way to 2015.
The outlook?
Well, it wasn’t necessarily good. Some would only go so far as to say it was “positive,” or “cautiously optimistic.”
With exception for development — in which case, Zell zinged, developers may as well use the next five years to study in medical school.
[ There you have it, five long years, and add in another 2 years for the Bend Lag effect, so figure 2018 for a sound Bend RE recovery. ]Zell, the co-founder and chair of Equity Group Investments, gave his lively talk Friday at the Burnham Moores Center for Real Estate University of San Diego 14th Annual Real Estate Conference.
During his hour-long keynote, Zell chided the federal government for “changing the rules,” took a swipe at President Barack Obama’s 2,200-page health care overhaul, and, no stranger to colorful language, said, “To say we’ve come through a decade of spending too much f**king money would be an understatement.”
Oh, and, he delivered a thorough, some say spot-on look at what’s ahead in commercial estate, noting, “Reports of the demise of real estate have been greatly exaggerated.”
In his forecast, Zell predicted:
– Investors will make deals with commercial real estate owners, using investment capital to pay down an underwater mortgage in return for a favorable equity position in the project. “If there are opportunities in distressed real estate, it’s in buying the debt in return for equity,” he said.
– Occupancy rates will continue to improve, albeit slowly, and at 20-30 percent lower rental rates;
– Multi-family markets will continue to grow and improve through 2011. Zell said on some apartment complexes late last year Equity Residential had more than 40 bidders . “There’s a food fight today to buy assets,” he said;
– The retail and industrial markets will continue to be “survival of the fittest,” and “lifestyle center” - mixed use commercial developments - might as well be “converted into churches, on the theory there’s a lot of space, and based on (Zell’s) assessment, they’re very cheap”;
– New development is a very long way off. “Construction loans are not available today, and they’re very unlikely to be available tomorrow,” he said; and
[ Best time in 20 years NOT to be in Building racket. ]
– A single family market at equilibrium. “The number we see now are much greater impacted by very serious pockets of excess (overdevelopment), as opposed to the broad malaise that occurred a year ago,” he said. Also, he noted, regions including South Florida and cities like Davis, Stockton and San Diego, Bend, Oregon may see slower recovery, based on excessive inventory. “I don’t think the U.S. housing dream is over,” Zell said, “but if you look back over the last 40 years, every single time the percent of single-family home owners exceeded 62 percent, we got ourselves in trouble. This time, courtesy of subprime loans, we were up to 69 percent. Now we’re at 66 and we need to get to 63, 64 percent before we have a sustainable, affordable single-family market.”
Zell kicked off the event with harsh words for the Obama administration and the Federal Reserve, saying there is a tremendous amount of uncertainty in large part because they are “changing the rules.” And, in order for full recovery, Zell said, “You need a clear concise understanding of what the rules are.”
“Today we find ourselves in the position where the definition of economic policy is designing new forms of bailouts, rather than focusing in on, and in effect, helping the economy grow,” Zell said. “This administration is picking winners and losers.”
Dr. Mark J. Riedy, executive director of the Burnham Moores Center for Real Estate, said he thought Zell’s forecast was “spot-on” and that “uncertainty is clouding things and inhibiting decision making.”
Riedy said he wasn’t the only one who agreed with Zell’s take.
“Generally, the people who approached me afterward said, ‘You know, Sam Zell hit it right on the nail,’” Riedy said. “Not that it was good news, but I like to say he was being realistic.”
Dr. John C. Ferber, director of commercial real estate at the center, said Zell has an “uncanny” knack for forecasting.
“I couldn’t find anything where I disagreed with him,” Ferber said.
Ferber called the prognosis “cautiously optimistic.”
“I thought there was some hope there,” he said.
