DLA Piper Summit: Recession was ‘Panic’, Zell Says

Eighteen months ago the U.S. economy was in full-fledged panic. That’s according to Sam Zell, who spoke at DLA Piper’s Global Real Estate Summit 2010 on Tuesday. The chairman of Equity Group Investments spoke along with fellow panelist Michael Fascitelli, President and CEO of Vornado Realty Trust, at a panel titled “Where Have We Been and Where are We Going?”

May 4, 2010
By Allison Landa, News Editor

Eighteen months ago the U.S. economy was in full-fledged panic. That’s according to Sam Zell, who spoke at DLA Piper’s Global Real Estate Summit 2010 on Tuesday. The chairman of Equity Group Investments spoke along with fellow panelist Michael Fascitelli, President and CEO of Vornado Realty Trust, at a panel titled “Where Have We Been and Where are We Going?”

“Clearly, the situation has dramatically changed from where it was 18 months ago,” Zell said. “I think that the word that nobody has used or not used enough is that we had a panic, just like we had a panic in 1873, in 1907 we had a panic. And the government’s actions basically stabilized the situation. But it really was a financial system panic.”

Fascitelli said no one would have predicted as vicious a decline as was witnessed in 2008 – or the rapid increase in the stock market that is being seen today. “It’s a much more steep and condensed time frame than anyone would have expected on the way down and on the way up,” he said.

Moderator Dee Anne Reiss, a Senior Consultant with Ernst & Young’s Real Estate Center, questioned the two speakers as to whether the U.S.’s standing relative to the rest of the world is sustainable.

“We have incredible debt right now, we have massive trade imbalance,” she said. “Are we looking at being the next Greece?”

“We certainly are acting like we would like to be,” Zell replied to audience laughter. “Obviously I’m not comparing the productivity capability of Greece with us, but we’ve been riding a game for a long time and have had the extraordinary advantage of having the reserve currency … The world is challenging that currency.”

Fascitelli rebutted that America is at a major advantage over Europe. However, “we have to pay for this just like real estate had a party and they had to pay for it.”

In terms of real estate, both Zell and Fascitelli asserted that jobs will lead the way out of recession.

“We had a whopping recession,” Fascitelli said. “It wasn’t led by commercial real estate this time, which was rare, and it wasn’t led by overbuilding … So you’re going to see job growth, and I think the question is where it will be, and how rapid it will be.”

Zell believes that the current 9.7 percent unemployment rate is not likely to be dramatically different by the end of the year. “So maybe it’ll be 8.5 percent or something like that,” he said, asserting that even that amount is a serious bout of unemployment. “I think it’s going to take much more confidence-building before we see much more additions to employment.”

He added that this was a demand recession in the real estate world, with demand plunging and vacancy rising. “We have had nothing built other than apartments since July 2007,” he said, “so effectively we haven’t had any new supply … it’s as much a question of supply as anything else.”

He believes what he calls “non-obsolete forms of commercial real estate” will fill up given that there is little new supply and the country is growing.

“I don’t know what will happen to all of the lifestyle centers and enclosed shopping centers for which there was no justification,” he said. “I don’t know what’s going to happen to all of those suburban glass-block office buildings which were all built for marginal tenants … who were very easily offshored and will (continue to be) offshored.”

However, he expressed optimism about the future of central business districts and in-close housing, which he predicts will fill up over the next 12-18 months.

Fascitelli pointed out that the market has an approximately $700 million leveraging problem given that a flood of maturing loans are poised to hit the market: “It’s not like shooting fish in a bowl right now,” he said.

Zell noted that between 2000 and 2007, 60 to 70 percent of all American real estate was sold and subsequently overleveraged. “Nobody’s got any equity, and if nobody’s got any equity, what’s their incentive to sell?” he asked. “It’s going to get resolved transaction by transaction, one at a time. The only transactions that are relevant are the ones that are getting done.”