Speaking at the BMO Capital Markets Conference in Chicago , Zell addressed a crowd of commercial real estate executives on issues ranging from global investment opportunities to the current political environment in the U.S.
When the economy was hit hard in 2008 many prognosticated that owners in the commercial real estate market would be forced to sell distressed properties at a rate that could be compared to the market of the early 1990s.
However, as we sit in September of 2010, this scenario has not played out and Zell does not see it happening anytime soon.
“With interest rates so low the banking industry has been inadvertently encouraged to hold onto assets,” he said. “The cost to carry interest is very low.”
Nationwide, new construction is historically low, keeping the supply side in check. As demand slowly returns and supply stays the same, owners will begin to see relief. If interest rates continue to remain low, banks will wait for this scenario to play out with little penalty.
There is also an imbalance of supply and demand in the real estate investment market, where a considerable amount of capital is targeting a small amount of quality assets, Zell said.
“As long as supply remains low the performance of high quality assets will continue upward.”
In Chicago, it would take $45 per square foot in rent to justify a new building, while most buildings are around $28 per square foot right now, he added.
Zell said that investment in core CBD property in the U.S. might be good for long-term investment engines like pension funds, but for many investors the returns will not be as good as they could be in other parts of the world. He has become bullish on emerging markets, especially Brazil, which he calls the “number one place to invest in the world.”
“The engine has changed in this recession,” said Zell. “It used to be that the U.S. got a cold and the rest of the world got sick. That is not the case anymore. In this last cycle the U.S. suffered, but places like Brazil, China, and India thrived.”
Zell is now the second largest homebuilder in the Brazilian market. He has had good experiences developing in China as well, but overall does not consider it as safe of an environment as Brazil. In China, the laws of supply and demand don’t necessarily apply as the Chinese government has overarching control of business transactions, making it too unpredictable of a market.
On the home front, Zell is less than enthused with the current political environment and does not hide that he isn’t pleased with the current resident at 1600 Pennsylvania Avenue, calling President Obama the “most anti-business president we have ever had.”
When referring to the upcoming November elections, Zell said that they are “the most important elections of my lifetime.”
“Control by one party has shown that absolute power corrupts absolutely,” said Zell. “There are no checks in the current system and we need balance. I think the business community sees this election as a stop to uncontrolled spending and regulation. If we don’t regain balance, I think it will cost this country growth.”
As far as U.S.-based real estate investments, Zell’s firm Equity Group Investments has most recently made purchases in the hotel industry. The firm owns 18% of Starwood Hotels, an investment that seems to be on the cusp of paying off.
“Demand is there for hotels,” said Zell. “They are not building any more hotels. Hotels were hurt on revpar, but occupancy is back up. When steady occupancy returns revpar will go back up.” ( revpar-revenue per available per room) ( credit m.thomton mren)