Ultimate Market Timer Sam Zell: “Know What the Problem Is?”

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Zell gets even gloomier, hammers ZIRP, starts selling.

“No one has ever accused me of not being a realist,” Sam Zell told CNBC. The chairman of Equity Group Investments and of apartment mega-landlord Equity Residential was talking about the markets for office and apartment buildings in some major cities that have already peaked.

“Overall we’ve come off this extraordinary period of liquidity and this extraordinary period of low interest rates,” he said. “I think we’re unlikely to see a repeat of that going forward, and I think we’re going to see more supply in what had been pretty tight markets.”

And he has been selling. Back in 2007, he once again proved his sense of market timing. As the commercial property bubble was already teetering, he sold Equity Office Properties Trust to Blackstone for $23 billion, not including $16 billion in debt. Then prices crashed, and commercial property defaults hit the banks. As the dust was settling at the end of the Great Recession, he went on a shopping spree.

Now he’s selling again, unloading multifamily properties at peak prices on a massive scale just when a multi-year construction boom is flooding the market with new supply. Here are some nuggets:

Last October, Equity Residential sold 72 low- and mid-rise properties with over 23,000 apartments for $5.4 billion to Starwood Capital Group. With “pricing currently available in the commercial real estate market, it is very hard not to be a seller,” Zell said at the time.

Equity Residential still held 318 properties with nearly 86,000 apartments. In November, it put its Berkeley, CA, portfolio up for sale: eight buildings with 452 apartments and the entitlement rights to build a 205-unit complex.

In February, it inked a deal to sell its Woodland Park property with over 1,800 rent-stabilized apartments in East Palo Alto, CA, to an affiliate of Sand Hill Property Co. It had bought the property in 2011 at the bottom of the local real estate market. More deals are expected or are already transpiring.

So when Sam Zell speaks, our ears perk up.

On CNBC, Zell lashed out in his soft-spoken and well-balanced manner against the current zero-interest-rate environment in the US, and the fundamental damage it was doing — the man who so hugely benefited from it:

“In the most simplistic terminology, I would ask you the question, if something is free, is it valued? Is it appropriately risked?”

“I think when you talk about interest rates being close to zero for a long period of time, I’m very concerned about the fact that we have desensitized our business community to the cost of capital.”

“And we know that the cost of capital ain’t free,” he said. “Every time you defer facing up to the cost of capital, it’s going to catch up to you. That I think is the biggest concern.”

“We have distorted markets. Maybe we have bubbles.” Then, on second thought, he said, “I don’t even know what a bubble is, so I wouldn’t want to be the definer of it. But I think that we have too much intervention and not enough market movement in interest rates – and in other assets.”

“You know what the problem is? The problem is I think the Fed should have raised interest rates two years ago, and therefore today would be able to make a much more rational decision as to what to do. The problem is that they’ve so deferred reality for so long that I think they have a serious credibility problem if they don’t raise rates.”

Then he added another twist to this conundrum: “So now we’re talking about raising interest rates because of credibility and not because of economics.”

And the fear of losing “credibility” – what’s left of it after more than a year of flip-flopping on rates – may be why Fed heads are parading up and down in front of the media with suddenly invigorated rate-hike rhetoric. Meanwhile, Zell is selling, at peak prices, unloading assets at the top while he still can.

References to 2009 & the Global Financial Crisis keep popping up in reports on manufacturing, not only for the US but globally, because that’s how bad it has gotten. Read…  Manufacturing Recession Goes Global as Demand Withers

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  34 comments for “Ultimate Market Timer Sam Zell: “Know What the Problem Is?”

  1. OutLookingIn
    May 27, 2016 at 1:10 am

    I think Sam believes the old maxim, ‘its best to be a month or two early, rather than a day late’.

    The fundamentals are horrible;
    Capacity utilization
    Wholesale orders
    Retail sales
    Industrial production

    And it looks like money managers are holding a record pile of stinking crap! With portfolios holding (HYG) an historic high of 35.8% in corporate bonds.

    When looking at the history of the DOW, as extended range-bound activity in an overvalued market where;

    a) DJIA had gone more than a month without setting a 20 day high or low
    b) DJIA was confined to a range of less than 6%
    c) DJIA was within 10% of a 2 year high
    d) The Shiller P/E was 18 or higher

    We find 7 periods that fit these parameters;

    And the seventh? Is now!

    You may draw your own conclusions, but it seems like Sam is getting out while the getting is good! Looks like a crash is near.

  2. d
    May 27, 2016 at 2:09 am

    The writing is in the charts.

    Those who refuse to read them without rose tinted glasses on will get smashed by them.

    ” OutLookingIn
    May 27, 2016 at 1:10 am

    I think Sam believes the old maxim, ‘its best to be a month or two early, rather than a day late’. ”

    Very succinctly put.

  3. frederick
    May 27, 2016 at 5:23 am

    İ agree with outlooking that is the reason Zell is selling Nothing worse than getting caught up in a selling panic and deflationary implosion and thats why İ sold my properties in 2014 alittle early İ admit because İ never believed thay could keep the plates in the air this long

  4. Petunia
    May 27, 2016 at 7:48 am

    As a big corporate landlord Zell would be in a position to see that rents have peaked. The rents are rising rapidly while incomes are falling just as rapidly. I personally experienced this in south Florida and it forced me out of the rental market there. Many of the people who rent from Zell would probably not qualify to sign the renewal leases if they had to re-qualify.

  5. Ptb
    May 27, 2016 at 8:40 am

    Zell is one guy I would not bet against! My own observations of rent prices, where I have SFRs for rent, in the last year are that they’re peaking or have peaked.
    And there are a lot of apts for rent. Plenty of construction in process as well. I’m putting some on the market now.

    Check the mls for inventory levels in any given market. When it doubles for a given seasonal market, people are probably getting out. As others have stated, better to be months or even years early rather than a day late. Never be afraid to take a profit off the table.

    • VegasBob
      May 27, 2016 at 2:12 pm

      I live year-round in a seasonal area of Arizona.

      Realtors are holding multiple open houses for 1 BR condos that are priced around 40K. The unit next to me which is listed for 41K has already had one sale fall through.

      That makes me think that it won’t be too much longer before this whole sorry Potemkin economy falls off the cliff.

        May 27, 2016 at 3:27 pm

        Did you use to comment over at “Mish’s” blog? I did too….

  6. ke
    May 27, 2016 at 11:04 am

    Rotation function. Wall Street, being replaced with automation itself, is simply amplifying the garbage coming in as output. The Internet discovery phase has popped all the layers off the stack, for anyone who cares to look, and we are down to the gals running RE out of NY, as a counterweight. Artificial RE inflation and arbitrary access to bankruptcy is a brake on productivity, direction and speed.

    • Vern
      May 27, 2016 at 3:18 pm

      Lysergic acid or ‘shrooms?

  7. bud
    May 27, 2016 at 11:42 am

    When people finally have had enough gouging and the ‘pay no rent’ movement sweeps the nation, Blackstone will go to Deutch Bank and get a bridge loan until Wall Street can make a tranche to sell to the Fed.

    The old motto: “no child left behind” will have new meaning

    • Petunia
      May 27, 2016 at 12:01 pm

      The president recently said that he will be pushing to integrate the suburbs with more minorities. What I thought instantly, is that he is expanding the section 8 program to bailout the large corporate landlords, who have reached peak rent revenue levels. These large landlords have no place else to go to increase their revenues. They barely maintain the properties, they hire all the illegals they can find, they steal the deposits, and the renters are broke. Where else can they go but to the feds.

      • Charles J Edwards
        May 30, 2016 at 1:43 pm

        Petunia, do you have any evidence that the president is expanding Section 8? If you do not, then I wonder why you choose to build an entire post on a completely groundless supposition?

        • Darren
          June 4, 2016 at 3:52 am

          Hillary’s rumored running mate, Housing Secretary Julian Castro, is cooking up a scheme to reallocate funding for Section 8 housing to punish suburbs for being too white and too wealthy.

          The scheme involves super-sizing vouchers to help urban poor afford higher rents in pricey areas, such as Westchester County, while assigning them government real estate agents called “mobility counselors” to secure housing in the exurbs.

          Castro plans to launch the Section 8 reboot this fall, even though a similar program tested a few years ago in Dallas has been blamed for shifting violent crime to affluent neighborhoods.


    May 27, 2016 at 7:37 pm

    I can do Zell one better:

    We have 6 months.

  9. Brian Richards
    May 27, 2016 at 8:31 pm

    Sam Zell is one smart cookie. Only time will tell if he sold near the top, but I think it is probably excellent timing. My primary guide is cap rates, and they are astonishingly low here in California. When cash flow is virtually non existent, and “investors” are still lining up to buy multifamily, hold on to your cash. It’s likely to buy you a lot more in the future.

  10. As
    May 27, 2016 at 11:26 pm

    Deciding to sell is one thing. But where is he putting the cash ?

    • James
      June 18, 2016 at 2:52 am

      He’s sitting on it, probably g-bonds waiting for the next big move.

  11. Agnes
    May 28, 2016 at 1:04 am

    I think the Fed will raise rates a quarter point(heck I have lots of practice being wrong). My reason is this: the $indu has triple topped and it is May. It won’t be their fault, it will be the fault of “sell in May, go Away”.

    As to where Zell will put money … Water? Cocoa Sugar Coffee and Rice futures?

    • May 28, 2016 at 8:01 am

      Good question! Here’s a possibility: cash (& deleverage) and wait.

      After prices come down, he can go shopping (and re-leverage). You can only benefit from a drop in prices if you’re liquid.

      • d'Cynic
        May 28, 2016 at 4:40 pm

        Markets can stay irrational longer than you can stay liquid. Oh, never mind. :)

    • robt
      May 29, 2016 at 10:15 am

      A hard-asset guy like Mr Zell would probably not be attracted to futures or any derivatives unless it was with walking-around money for entertainment only!

      • Agnes
        May 30, 2016 at 1:01 am

        robt I agree in principle about hard assets, but plain vanilla futures are not quite the same as derivatives(except for silver on the comex): a plain vanilla future is a promise To Deliver! a set quantity of goods at a set price on a set day.

        • robt
          May 30, 2016 at 9:32 am

          You’d either be a producing farmer or miner then or have a big warehouse full of stuff that you bought to deliver later. Spot plus contango would be the price you receive for the goods you’ve been sitting on for a long time – not exactly a big score, or maybe no score after expenses but you’ve locked in your price.
          If you sell futures without the goods in hand or the capability to produce them under your direct control it’s speculation; you’re hoping the spot will be significantly less so you can make the big bucks by buying the goods cheaper and delivering, if the buyer actually wants the product. But what if the spot goes up by delivery day and you must either come up with the goods or settle? Therein lies the risk.
          Essentially, all futures contracts are ‘plain vanilla’, but most never get delivered, they’re settled before the expiry
          date. Those who actually need the goods take them, and the rest of the open contracts disappear.
          Maybe Mr Zell could sell options to purchase his real estate, receive the revenue from the options (should anyone want to buy them), and if the RE market goes down he keeps the unexercised option revenue which would offset the loss in RE value if he wants to sell – if he doesn’t want to sell, the options are a bonus through the rough times. If the options are exercised, the RE is sold, he’s guaranteed his price and the revenue from the options is also a bonus – he just doesn’t get the higher price he otherwise would have.
          Anyway, interesting stuff.

    • duane
      June 4, 2016 at 2:34 am

      Saw an interview with him several months ago where he was discussing his liquidation. Intervewer asked him what he was buying and he said “gas wells. They are on sale”. Interviewer looked very confused/surprised and did not even bother with a follow up question.

  12. rich
    May 28, 2016 at 5:16 am

    With 76% of Americans living from paycheck to paycheck, where’s the money going to come from to pay higher rents? As Herb Stein once said, “if something can’t go on forever, it will stop”.

    • Petunia
      May 28, 2016 at 11:26 am

      The money for higher rents stops because it isn’t there.

      Then you vote with your feet. We did, we had to. People are leaving Florida and California because the cost of living is too high and going to lower cost areas. Mobility is a big asset in this economy. Things are never going to be the same again.

  13. hidflect
    May 28, 2016 at 10:19 am

    Markets crash at the periphery first. In Western Australia all the mining towns lost 40+% of their value. Now the main city is down 10%. Next is Sydney, then we’ll see the fabled LA RE market buckle.

  14. Rick Feibusch
    May 28, 2016 at 1:13 pm

    We had owned a stylish triplex in Venice, CA (the beach of LA) and lived in one of the apartments for 26 years. The little place we paid under $200K for was now worth $1.5 million. Yes, we did lotsa remodeling over the years, mostly because we lived there, but we were seeing neighborhood properties selling so high, we wondered, how much higher could it continue to climb??? We came to similar conclusions and sold at the end of last year. Holding on now will ensure that you will have to keep holding on for at least another eight years, and at 68-years-old, I didn’t have the time…

    • robt
      May 29, 2016 at 10:07 am

      There is another approach to this. What did you want to do with the money? If you had a triplex, presumably paid for, and you have to live somewhere, if you enjoyed where you were living, had income from the other units that met or would have met your needs even if the rental market took a dive and you had to reduce rents to keep good tenants, what benefit is there to cash out, especially in the senior age group?
      From the 1980s my wife and I have expected and seen markets go up 100%, down 40%, up 200%, and now possibly looking at another collapse, but love where we are (as does everyone else trying to buy here), live almost for free, have few needs, and wouldn’t have any use for the money anyway except to leave more of it for beneficiaries to fight over.
      On a macro scale, Mr Zell has different objectives: they’re different because he’s playing a market.

      • nhz
        May 30, 2016 at 5:06 am

        exactly, selling your own home because of perceived ‘peak prices’ usually doesn’t make sense unless you can rent for a decent price (usually very tough at such a time), want to downsize significantly, plan to emigrate or move to a far cheaper area where you can still have a good life.

        In my country (Netherlands), home prices increased by 500-1000% in many areas during the nineties while inflation was in the 2-6% range. Good time to sell? No … there were some price hiccups after 2000 and 2008, but prices by now in the more speculative areas are again 100-200% higher than in 2000. Everybody who sold then is way behind, not even counting the sky-high rents you would have to pay if you were ‘renting until prices get back to sane levels’.

        The housing market is a prime example of how prices can stay irrational (from a fundamental point of view) for far longer than people can imagine. The mantra that everyone can ‘get rich quick by buying a home’ is alive and kicking despite two mini housing busts. It’s killing most of the productive part of the real economy but who cares, in a few years everyone will be a paper millionaire. Voters love this stuff so it will continue until the system collapses.

      • Agnes
        June 1, 2016 at 2:28 am

        Ah yes, selling covered calls, Robt (i couldn’t answer above, no reply box). But I actually did mean buying the futures of commodities…it is hard to buy in quantity elsewise and they are vastly underpriced. Your explanation was nice. Thanks.

  15. ML
    May 29, 2016 at 3:00 am

    I do not know how lomg it takes to sell real estate after finding a buyer in America but here it UK (England and Wales) where iffers are subject to contract it usually takes a few weeks sometimes a couple of months for the lawyers to do their bit. it can be done quicker if you know what you are doing – long ago a client agreed to buy a property in the morning, he exchanged contracts same day afternoon; he got an offer so he sold the property next day but shortly after got a higher offer so he bought the contract off the first buyer and then sold to the second buyer; all done within a couple of days and good profit for a week’s work. Anyhow, because of the time lag and because getting out before a predicted price drop has to be done before it becomes apparent to mkre buyers it is generally prudent to sell up a few months beforehand.

    Unlike the stock market, timing the peak of property prices can only be a rough but shrewd guess.

  16. chris Hauser
    May 31, 2016 at 10:07 pm

    um, sam does what he does ’cause that’s what he does. he’s not always right, but yes, prices are high and yields are low. you do the arithmetic.

    if i have a low basis, i’m staying put if i like the future. if i don’t, i ain’t.

    • Captain KurtZ
      June 1, 2016 at 1:10 pm

      Wow, and we here in Seattle make fun of the Chinese for building ghost cities……

      When the commercial and apt RE bubble pops here, and all the gold rushers stampede back to their Midwestern rabbit holes (like happened twice in my lifetime, Boeing bust of ’68, and the Vietnam/Reagan de/recession of the late 70’s early 80’s) we will have a ghost city like no one has ever seen.

      40 story buildings are going up in about a year all over downtown, without any tenants pre-leased (definition of a ghost building) Every parking lot is targeted right now for re-dev. Rainier Square is supposed to get a 100 story tower.

      I swear that pencil-dick Martin Selig (our cheap version of Trump) plans on building a high-rise bigger than Mount Rainier itself, and the blind/deaf/dumb political-tech class would applaud. Oh the techno-solipsistic hubris, a virtual Mount Rainier downtown, when the real one is a four hour drive away.

      We have pulled demand from the future, so that we were overbuilt by ten years, in 2008, to now we will be overbuilt by 25 years when it all collapses. It won’t be ghosts that haunt these empty skyscrapers,….

      ….. but the Zika-filled ponds where construction stopped and there was nothing but a hole.

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