Investing in the Property Markets

October 22, 2013

My notes from the talk that Sam Zell gave at Wharton.

Obama is more like William Jennings Bryan than FDR who he wants to be like. Class warfare is creating uncertainty. Executive branch independent of rest of government. Investment decisions made based on level of uncertainty; hard to have conviction to take big risk today. If you want wealth redistribution, you must sacrifice growth. You must choose one or the other. Mixed message as to what our goal is. Where is the demand going to come from? Productivity in the long run is 1+1 = 6. Not sure about social networking - takes time away from something else.

We have never invested in Europe and we have invested everywhere in the world. Can't understand the demand side of the equation. Getting a lot of immigration but not the kind you want. More social unrest to come. Europe is great for cheese, wine, castles. I go to the South of France all the time and it's great - the wine, the sunlight. They just don't fucking do anything.

Emerging markets: theme of people moving up from poverty to the middle class: shopping in Brazil, apartments in Mexico. Aspirational investments in aspirational places. Follow the countries as they get to investment grade. The one time countries are disciplined is when they approach investment grade. It's the one time they behave.
In the long run, there's probably nothing as important as population growth. Put Mexico at the top. Border w U.S., Fukushima fallout (supply chains from much closer). Central west Mexico. Manufacturing not assembly. Asia - best growth, but no shortage of capital. Population growth, demand.

Residential (Equity Residential). 20 years ago IPO. Second or third multifamily public. $800 million total market cap. 100% of assets suburban low rise multi family assets. Equity Residential $34B market cap today, almost no suburban garden variety properties. 10 years ago said the future is 24/7 cities, high rises and have acted upon that vision. Demographics - one year after college for him, 95% of classmates were married and many had kids. Avg. age today to get married is 29 for men and 26 for women, vs. 20 before. Whole attitude toward housing has changed. Four private schools in Chicago 20 years ago, 25 today. We believe we're well positioned.

The Grave Dancer (term of affection). No grave dancing this time - why not? In previous times, the banking system chose to accept the penalty, liquidate their portfolios, and move on. This time, they played the extend and pretend game. In 2001, FAR in NYC was $50 a foot. By 2007 this was $1,200 to $1,600. It didn't take a genius to see this was out of wack. In the last four years, we have only done about 10 real estate deals. Our time horizon will remain short until we see a clearing of the market. Still a lot of legacy debt out there.

In 1981 tried to do a hostile takeover of a big historical REIT. Ran into competition from Hong Kong - went to visit. Offices were 90 sq ft there vs 250 in U.S. Now the Chinese are smaller, but they aren't that much smaller. Today we see firms downsizing or changing the use of their space along these lines. We are in the middle of changing how we use this space. Retail - obsolescence issues. Dinosaur malls 300k sq ft. with no anchor tenants - total disaster. Commodity retail is going to the web. In the last five years, traffic patterns have changed where people drive farther to bigger malls. A lot of the need has been filled online, so the shopping definition has changed.

How seriously do you take these looming public finance issues IL, CA, etc. Very seriously, we monitor that stuff all the time. To run NYC takes an iron fist, this new guy (mayor) seems like a velvet glove. That's what diversification is all about.

Zell Lurie Real Estate Center. Endowed 16 years ago. Bob Lurie. Why is his name on the door? Fraternity brothers at U of Michigan. Started in real estate managing apartments as junior in college. Bob was my first employee. Had a significant business managing thousands of apartments by the time I graduated law school. Made $150k the last year. Sold everything to get out of Ann Arbor - sold to Bob Lurie. Goal was to see if I could play with the big boys. He came to Chicago three years later to play also. Extraordinary relationship, lived at the same level of risk, finished each others sentences etc. As is the case with most such partnerships, we did quite well. He was diagnosed with cancer at 47 and died 23 years ago. Never lost my appreciation for what he did for me and hope he gets as much joy out of this as I do.

How do you do business today? First of all, I'm the Chairman of everything and CEO of nothing. So that means I've hired great people to run everything all around the world. I'm the owner, everybody else is the operator. How do I do this? Extraordinarily voluminous reader. Read every subject I can find. Read a book and a half of escapist fiction a week. Can't tell you what it's about a day later. But if it has a deep description of Berlin later I remember that. One of the key ingredients of being an entrepreneur is curiosity and observation. Look for anomalies in my readings - strange stuff. Louis Vuitton opening a new store in capital of Mongolia, which also would become the copper capital of the world. So I went! Kept seeing the name of a little town called Williston, North Dakota which doubled its population in a very short time - 25 people in line at Walmart, all men. Why this gold rush? Epicenter of shale boom.

Skill of having a conversation with someone, having them go away for a week and when they come back a week later being able to pick up the conversation where we left off.

European bank transparency - they don't even have that word in their languages. A rolling loan carries no loss.

I didn't know what I couldn't do. So I made it up as I went along. I read more than anyone else, observed more than anyone else. Have my own plane and fly 1,200 hours a year. Want to see it for myself and meet my partners in their home offices.