DLA Piper Summit 2008 Opens with Zell in Fine Form

The opening keynote session of “What Comes Next: Opportunities, Risks and Rewards,” the 2008 DLA Piper Global Real Estate Summit held Tuesday in Chicago, featured real estate uber-deal-maker Sam Zell (pictured) of Equity Group Investments in his usual pungent form. “This entire crisis could and should be placed on the shoulders of the accounting profession,” said Zell. Despite the many grievous mistakes made by other participants that contributed to the market’s current mess, he insisted that “without fair-market-value accounting, this whole situation would not have reached its current level.” Zell said that earlier this year, he had in fact suggested to Treasury Secretary Paulson that Paulson suspend what Zell calls “fire-sale valuation accounting.” Zell’s co-keynoter Peter Linneman, Ph.D., of the Wharton School of Business, asked a question that others, too, would ask during the conference: Who’s going to be responsible for performing due diligence for the federal government with regard to all the assets it will be acquiring under the proposed market bailout? Noting the remarkable illiquidity of these assets, Zell commented, “All the writedowns to date are on spread, for a market that doesn’t exist.” == The central theme of the current crisis, Zell said, is “No skin in the game.” On a similar note, he said that it was “pretty absurd” that Blackstone was able to buy Equity Office Properties from him for only $3 billion of equity on a total purchase price of $39 billion. On the public policy angle, Zell noted that he has been in the real estate business for 50 years, and that every time in that period that the federal government has tried to drive the home ownership rate up past 62 percent, the results have been disastrous. A key element in our present troubles, he said, was “blind faith in the value of a house” and in the idea that it would keep going up. Both speakers touched on predatory borrowing and the role of speculators, and not just owner-occupants, in driving the housing bubble, Linneman referring to a hypothetical investor with five houses in Phoenix – and a really unhappy expression on his face. “What is the value of anything,” Zell asked rhetorically, “other than the cashflow that comes out of it?” In trying to tackle the apparent disconnect between Wall Street and Main Street, Zell suggested that people have gone from using their home as an ATM to using not paying their mortgage as an ATM. “Housing is not an investment,” he insisted. “It’s not an ATM. It’s a place to live.” Moving forward, Zell said, “The biggest issue to focus on is confidence, because without confidence, people won’t make a commitment.” He made a point of saying that he’s very leery of any legislation that would modify existing contracts. Zell said that one of the bright spots in the current morass is that not much commercial real estate supply has been added in the past 18 months. He also pointed out that “There is no shortage of equity today” for top-tier assets, though he predicted a long, slow recovery for “commodity real estate.” Finally, despite the current troubles, he expects the dollar to be strong over the next 36 months. “Buying the euro,” he said, “is like investing in turtles.”