Zell-High Quality CRE Will Fill Up With Lower Rents

Billionaire property investor Sam Zell said high-quality buildings will fill at lower rents over the next year and a half amid a slump in commercial real estate construction.

“Over the next 18 months I think we’re going to see little or no new construction and we’re going to see all the institutional-quality assets be full,” Zell said at the Real Estate Briefing hosted by Bloomberg Link in New York. “The bad news is they’re going to be full at 20 or 30 percent rates less than the peak.”

Zell, the chairman of Chicago-based Equity Residential sold his Equity Office Properties Trust in 2007 for $39 billion as the commercial real estate market was peaking. Property prices have plunged as credit contracted and the economic slump boosted the unemployment rate and employers cut jobs.

Zell said demand is strong among investors for fully leased buildings, and that there is little distressed commercial real estate on the market as lenders extend mortgage terms. Demand for such properties is outstripping supply, he said.

For fully occupied buildings, demand from investors is similar to what it was at the peak of the market, with bidding competitive for those properties, Zell said.

Zell, 69, said demand for multifamily housing is strong and occupancies are high. Equity Residential is the largest publicly traded apartment landlord.

Tribune Investment

Zell said he doesn’t regret his investment in Tribune Co., which filed for bankruptcy in 2008. In 2007, Zell and other investors took the media company private in a leveraged buyout. Zell said that, in the first quarter after the takeover, revenue fell 25 percent.

“The original decision I made, which was like every decision I make on an investment, is a risk-reward decision,” Zell said. “The risk and the reward were appropriate.”

Zell, through Equity International, which he co-founded with Gary Garrabrant in 1999, has invested in real estate- related companies around the world, including Brazil. (credit Bloomberg-b. liu, b. louis)

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1 Comment

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One response to “Zell-High Quality CRE Will Fill Up With Lower Rents

  1. Best in breed institutional quality assets continue to trade at historically low cap rates. Recent sales activity in my market (Tampa Bay, FL) shows sales from 5.75 to 6.25% cap rates for Class A to AA apartment properties while Class B office properties go begging for offers at 9-11 cap rates. How does this make any sense? It doesn’t if you view Class A to AA multifamily as real estate. It is shear genius if you are an institutional investor that views apartments as an alternative to Treasury Bonds. A 10-year investment in apartments looks like a brilliant move at a 6% unleveraged return compared to the 10-year T at 2.66%. Add some low cost, fixed rate leverage from Fannie, Freddie or FHA and your cash on cash yield goes into the double digits.

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