At the turn of each year since late 1994 Sam Zell, the real estate billionaire known as “the grave dancer,” has indulged in a fit of musical fancy. It involves writing lyrics that express his current worldview, hiring a band to sing them to a popular tune, placing a recording inside a music box of his own design and sending out several hundred replicas to friends and business partners.
Clad in a peach sweater and red baseball cap, Zell proudly shows off the boxes in his expansive sixth-floor office in Chicago’s Riverside Plaza. Coming off a tough year in 1994, Zell’s theme was “Staying Alive.” At the peak of the dot-com bubble in 1999 he called his creation “The Emperor Has No Clothes.” A few years later Zell riffed on the hollowing-out of American industry by having a song titled “Offshore” recorded to the tune of Petula Clark’s “Downtown”.
What is on Zell’s mind this year? With his latest box about to ship, he’s not saying. But one of Zell’s overriding themes each year is the importance of happiness, good health, prosperity and optimism. “Have you ever met an entrepreneur who wasn’t an optimist?” he asks. “A true entrepreneur doesn’t have the word ‘failure’ in his lexicon. Maybe [a venture] doesn’t work out. But no failures.”
Zell, 69, has good reason to expect things to work out. He has made most of his fortune buying distressed real estate during America’s darkest economic hours. He has also shown an uncanny knack for selling at the top, as he did in unloading Equity Office Properties onto Blackstone for $39 billion in 2007.
With a $4.4 billion fortune to fall back on, Zell is again focused on finding real estate bargains in places that others have overlooked. The Chicagoborn son of Polish World War II refugees, Zell cut his first property deal as a University of Michigan junior when he offered to manage apartments in exchange for free digs. By the time he’d earned a law degree from the same school, Zell was overseeing 5,000 apartments, including those in several buildings he owned himself. During a visit home Zell discovered the 16% he was earning on his Ann Arbor properties was four times what his father was making from real estate investments in bigger and better-known cities. A lightbulb went on over Zell’s head.
“I said, What I’m going to do is invest in growing cities,” Zell recalls.
This, and a highly contrarian ethos, have formed the crux of Zell’s investment strategy. Amid the property bust in the mid-1970s he became the largest buyer of distressed property. By 1987 he was raising institutional money, which gave him a large war chest to draw from when the market went on a tear in the early 1990s. With the business again fixated on distressed properties, Zell is steering clear of the conventional wisdom once more
“When this current panic began I was inundated with people who said, ‘Sam, when are you going to do a distressed fund? When are you going to do a grave-dancer fund?'” says Zell. “I said the opportunity is not going to be there this time.”
Zell’s thinking: With interest rates near zero, it costs banks almost nothing to let property sit on their books. That, in turn, has limited transaction volumes to no more than 10% to 15% of 2007 levels and kept prices for supposedly distressed buildings well above what a grave dancer would consider a bargain.
Instead, Zell’s optimism these days is focused on emerging markets. They’re nothing new to Zell, who spends 1,200 hours a year aboard his Canadair CL-600, reading five newspapers a day and six magazines a week along the way.
Zell and his top executives have been investing in emerging markets since 1999. His vehicle is Equity International, a private investment firm that has put about $1.5 billion into international markets, including Brazil, Mexico, Colombia, Peru, Chile, China and Egypt. Brazil alone accounts for half the funds. Zell likens it to the U.S. in the 1950s, when a large nation self-sufficient in everything from food to fuel was creating an economically powerful new middle class.
“We spent better than five years wandering around Brazil, talking to everybody who would talk to us before we made our first investment,” he says.
Zell thinks the Latin American real estate boom is in its early stages. Behind that view is his belief that the middle class will continue to create growing demand at a time when the conduits are few through which his fellow Yankees and other foreigners can compete with Equity International to supply capital.
Zell himself helped put together two of the handful of international property firms listed in New York— home builders Homex of Mexico and Gafisa of Brazil. (For more ways to invest in foreign real estate, see table below.) Backers of Fibra Uno, with which Zell is not involved, have been pushing for several years to make it the first U.S.-listed Latin American REIT.
China has proved a tougher nut for Zell to crack. Equity International has been investing in home builders there since 2006. Zell says capital is plentiful, but regulatory clarity is in short supply amid a constantly changing landscape.
“Ease of entry is very good in China,” he says. “Ease of exit is not.”
Equity International sees China, with its strong growth, as well worth the trouble and risk. Not so with Argentina and Venezuela, where Garrabrant says antibusiness regimes prompted Equity International to pull
What of the U.S.? Zell gives the current Administration low marks for its business-bashing policies but remains active. His two publicly listed REITs, Equity Residential and Equity Lifestyle Properties, have ridden out the financial crisis nicely, posting gains of 54% and 11%, respectively, the past year. Zell is optimistic about domestic real estate in 2011 but cautions that government policy poses risks down the road.
“There’s little doubt that what the government is doing right now [with its stimulative policies] is highly inflationary,” says Zell. “It’s pretty hard to imagine that interest rates are not going up in the next couple of years, and probably materially.”
A higher cost of capital would, of course, hurt property. Still, Zell expects some sectors to fare well. That includes apartment REITs amid declining homeownership. He also believes the lack of new office construction over the past four years and rising demand will slowly cut into the current 17% vacancy rate.
“I think the economy is likely to be a little bit better than everybody expects, and I think it’s very much a function of checks-and-balances returning on the political side,” he says.
Coming from a guy like Sam Zell, that message is likely to be music to the property market’s ears. (credit k. blankfeld, forbes)