Zell Sees Tough Stretch Ahead

Sam Zell, one of the nation’s most powerful real estate executives, said he anticipates a tough year for commercial real estate but that the industry is in good shape to handle a recession.

“We have a very bleak six months ahead of us, followed by a slow improvement,” said Zell, chairman of Equity Office Properties Trust, at the UCLA Extension Real Estate Finance & Investment Conference last week. “I don’t expect demand to pick up tomorrow.”

Despite the gloomy economic outlook, Zell said the industry’s relatively low level of debt will allow it to weather the economic slowdown better than most other industries.

“I don’t think we are in a catastrophic situation,” said Zell, whose Chicago-based company ranks as the nation’s largest real estate investment trust. “Despite the fact that we are in the middle of a recession, the real estate industry balance sheet has never looked better.”

Equity Office owns and manages about 125 million-square-feet of office space nationwide. In Southern California, Equity Office’s holdings include Sun America Center in Century City, Two California Plaza in downtown Los Angeles and Griffin Towers in Santa Ana.

In addition, Equity Office has formed a partnership with Los Angeles developer Robert Maguire to build a 426,000-square-foot office building, the first commercial project at the Playa Vista development near Marina del Rey.

Zell said that he anticipates an economic turnaround to begin by the middle of next year and that the pace of recovery will pick up speed by the end of 2002. The federal government’s plans to stimulate the economy will “play a major role” in the turnaround, he said.

“We have coming at us a financial stimulus tsunami of major proportions,” Zell said. “The country will come out of this in the latter part of next year.”

Long-term, the ongoing consolidation of the highly fragmented real estate industry will help moderate swings in rents and occupancy rates, Zell said. This is particularly the case in major urban centers where only two or three players, such as Equity Office, dominate the market for the most desirable space.

“It’s the last major ... industry to consolidate,” Zell said.

In addition to facing an industrywide shakeout, commercial real estate companies will remain under continued pressure in the years ahead as tenants keep looking for ways to reduce their real estate costs, Zell said.

Companies will look to squeeze more employees into less space, he predicted.

Real estate will increasingly become viewed by tenants as a commodity, forcing landlords to boost services and marketing to distinguish themselves. That will create new opportunities for people who may not necessarily have real estate backgrounds but are skilled at marketing, finance and corporate operations.

Real estate companies will “spend more on brands and marketing,” Zell said. “The real estate industry as we know it needs different kinds of employees going forward.”