Lowdown on Downturn : Real Estate Titan Sam Zell Offers Local Developers Little Sympathy
Sam Zell, one of the largest holders of private real estate in the nation, delivered his trademark one-liners and some R-rated jabs Wednesday to an audience eager to take his words to heart: Orange County’s wary commercial and residential developers.
“It’s really a pleasure to venture into La-La Land to see what used to be,” he told about 350 people gathered at the annual UCI Real Estate Conference, which was at the Four Seasons Hotel in Newport Beach. “. . . Everywhere else in the world they build for pent-up demand rather than for future demand. (In the United States) we weren’t building for demand, we were building for some schmuck that would buy it.”
Zell, the bearded, raspy-voiced chairman of Equity Financial & Management Co. in Chicago, has been called a “grave dancer” for his ability to buy failing companies cheap and turn them around quickly. Last year, the real estate titan and another investor acquired 80% of the Carter Hawley Hale Stores, the Los Angeles-based parent of the Broadway. He is now chairman of the board of the retail giant.
Although his roots and businesses are based in the Midwest, Zell didn’t mince words in challenging Southern California developers’ conventional wisdom.
To their cries of a credit crunch: “Hey, it’s a tough life. But nowhere is it written in the Ten Commandments that you are entitled to 95% financing.”
Or to their justification of Southern California’s high home prices because of the growing population: “Anyone notice a shortage of lots? You had a good thing here. Unfortunately somebody stopped the music.”
Zell, however, said that the downturn nevertheless has forced greater discipline among real estate leaders. Now projects get built only if there is real demand, and then only if there is available capital.
“We’re going to go back to basics,” he said. “It’s going to be all about discipline, reality and filling a need. . . . (In manufacturing) we can’t build the widget unless there is someone there to buy it. You have orders, backlog, real discipline.”
Yet, his criticisms didn’t go unchallenged. One Orange County home builder argued that banks have unfairly lumped viable residential developers with commercial builders, pinching the former’s credit lines and killing projects, even when there was ample need for homes.
“There’s a difference between discipline and punishment,” said Julie Newcomb, president and chief executive officer of Costain Homes Inc. in Newport Beach. “Credit and capital have been taken out of the industry to the extent that it has unfairly punished home builders.”
But Zell shot back: “Have you noticed anybody sleeping on the street of Newport Beach because there wasn’t a house for them to live in?”
Newcomb, who appeared on a panel with Zell, said that demand will reappear in the market once interest rates inch forward, giving buyers the notion that rates had rebounded from their lowest levels in decades.
“I’m not saying that (waiting for housing orders) is wrong,” Newcomb said. “It’s right. But what has happened is . . . the whole industry has come to a halt. You can’t tell me that credit got cut off and suddenly demand went away.”
But real estate leaders will have to assume more of the risk in their projects, rather than trying to get nearly all their financing from banks and insurance companies, Zell said. That will mean that more will turn to public markets, such as public offerings and real estate investment trusts.
Conference organizers also awarded University of California President Jack W. Peltason its Sumigarden Award.
Survey: Real Estate Outlook Bright
Industry leaders from across the nation are more optimistic about the long-term than the short-term prospects for real estate, according to those surveyed at the annual UCI Real Estate Conference.
A questionnaire distributed to a group of real estate leaders from across the nation drew these replies Wednesday from 265 respondents:
Industry’s outlook for the next five years: Southern California:
Positive: 83%
Negative: 8%
No change: 9% Nationwide:
Positive: 93%
Negative: 2%
No change: 5%
Outlook for the real estate industry in the next 18 to 24 months: Southern California:
Positive: 19%
Negative: 34%
No change: 47% Nationwide:
Positive: 69%
Negative: 10%
No change: 21%
Effect of the President’s economic proposals on:
Southern California economy:
Positive: 21%
Negative: 37%
No change: 42%
Nationwide economy:
Positive: 21%
Negative: 52%
No change: 27%
Effect of the President’s environmental proposals on the Southern California economy:
Positive: 10%
Negative: 67%
No change: 23%
Prospects for approval of the proposed North American Free Trade Agreement (NAFTA) by the U.S. government:
Ratified: 60%
Not ratified: 13%
Not sure: 27%
Among those who say NAFTA will be ratified, effect anticipated on the Southern California economy:
Little effect: 7%
Moderate effect: 23%
Strong effect: 70% Source: UCI Real Estate Conference
Profile: Samuel Zell
Position: Founder and chairman, Equity Financial and Management Co., a real estate firm based in Chicago.
Credentials: JD, University of Michigan Law School, 1966.
Background: Recently elected chairman of Carter Hawley Hale, which he rescued in 1992 by buying up most of its unsecured debt in exchange for 70% of its common stock. Established the Zell-Lurie Entrepreneurial Award Program at the University of Michigan. Member of 20th Century Fund Task Force on Affordable Housing. Widely published on the topic of real estate. Lectures worldwide on real estate and investment issues.
Nickname: “The Grave Dancer” for his ability to rescue failing companies cheaply and turn them around.
Source: UCI Real Estate Conference
