Real estate mogul Sam Zell said he expects little U.S. commercial real estate construction over the next one to three years except for apartment buildings, a hiatus that would restrict supply and boost the value of existing properties.
“We’re now approaching 3-1/2 years of no development, and I see little prospect for new supply over the next 12 to 36 months except multifamily,” Zell told investors and experts at an executive forum.
With little new supply, the value of existing office buildings, shopping centers, hotels, warehouses and distribution centers should increase and vacancies should fall, Zell said.
He said that could cause lenders to stop the practice of “pretend and extend,” a strategy in which maturities are extended on loans on “underwater” properties whose values are less than their loans. Property sales would then be fueled, he said.
“I think real estate is going to do well over the next 24 months,” he told the Argyle Executive Forum. “When the buildings fill, then pretend and extend is over.”
Zell, 69, initially made his fortune buying distressed real estate in the early 1990s during the U.S. savings and loan crisis, gaining the nickname “The Grave Dancer.” He later sold Equity Office Properties Trust, the largest public owner of U.S. office properties, at the height of the market in 2007.
Over the past several years, Zell has turned his attention to emerging markets, first with his investment in Mexican homebuilder Homex Development Corp (HOMEX.MX), then becoming one of the first significant U.S. real estate investors in Brazil.
Through his investment company, Equity International, he has stakes in Brazilian homebuilder Gafisa SA (GFSA3.SA), Chinese homebuilder Xinyuan Real Estate Co Ltd (XIN.N), and Homex, now Mexico’s largest homebuilder. He also has a stake in BR Malls (BRML3.SA), Brazil’s largest retail property owner and operator.
He said he was also interested in Vietnam and Indonesia, countries that have made significant progress on their monetary policy.
Zell said that U.S. investors should venture outside the United States, especially into emerging markets, where populations are growing and demand for goods and homes is ready to be satisfied. But he said there is a trade-off in emerging markets: giving up the rule of law for growth.
“When you go into these markets, the single most important issue is who’s your partner,” he said. “Ultimately he is the guy who has to protect you from the system.”
He also advised U.S. investors to look for scale in emerging markets. He recently sold a mall in Chile because the population does not support the scale needed for successful institutional real estate investment, he said. (credit i jonas reuters)