NAI SPECIAL REPORT: Linneman, Zell Sound Off

Two real estate heavyweights agreed to disagree during a conference at NAI Global Market Outlook in Chicago.
LinnZell

Renowned real estate economist Peter Linneman, who is NAI Global’s chief economist, and Sam Zell, the salty real estate billionaire, didn’t argue with each other as the main speakers at today’s NAI Global Market Outlook in Chicago. But they did disagree (somewhat) about the direction of the U.S. economy and, by extension, the CRE market. Linneman posited that the economy still has at least two or three more years of reasonably good growth ahead. Zell was not so sure. “The situation is better than it was, but it’s important not to get too kumbaya right now,” he said.

Linneman laid out the case for moderate optimism: the current recovery is longer than usual in the post-WWII period, but in terms of jobs and GDP growth, it’s still quite early in the recovery. Also, only in recent months has consumer confidence edged above average. Historically, the economy tends to grow for another few years after that.

Zell said that any number of things could upset the current growth trajectory. “Never in my profession life have I seen so many potential black swans,” he said, citing the continued strength of the dollar, or the fracturing of the euro, or even a political implosion in a place like Venezuela, as potential “tipping point” events. More specific to commercial real estate, Zell asserted that demand in most sectors — except maybe apartments — is still too tepid to sustain robust growth.

The diminutive real estate mogul also groused about the Obama administration, and what he called its redistributionist tendancies. Businesses will not grow in such a climate, he said, and thus there won’t be strong demand for commercial space in most U.S. markets until that dymanic changes. And it won’t change until at least 2016, provided the country elects a “pro-free market” president, he said. Linneman generally agreed with that assessment, calling the current administration “unsurpassed in its interventionism” in the economy, a situation that’s stymying growth.

Linneman added that one traditional engine of office space demand — the financial sector — isn’t going to be a growth engine for real estate as long as it has to deal with the various burdens of over-regulation. Zell cited advances in artifical intelligence as a wild card in the future of CRE. What happens to the need for office space when highly sophisticated algorithms replace certain classes of white-collar workers? he asked. It’s coming sooner than everyone thinks.

Will demand by tech companies be the saving grace for the commercial real estate market? The speakers took up that question, and Zell came down on the more skeptical side. Tech industry growth isn’t quite built on a foundation of sand this time around, as it was in the dotcom bubble, but it isn’t that much better, he said. Tech is thriving now because of the availability of capital, Zell opined. As long as the capital flows, many tech companies will be able to pay their rents. If not, then not.

“If the credit of your tenant is zero, you shouldn’t sleep at night,” Zell said. That’s the case no matter how novel or inventive their tech idea is.

In a private exclusive interview with CPE ahead of the event, Linneman re-iterated his optimism about CRE market prospects for the next few years, and noted that the influx of investment capital the market isn’t going to slow down. In fact, especially on the debt side of the equation, there will be more investment ahead.

He also noted that foreign investment in U.S. commercial real estate, while sometimes headline-worthy–such as the Chinese investors who bought the Waldorf-Astoria recently for nearly $2 billion, or the big-ticket condos that trade in New York or Miami–isn’t as important as it might seem. Most U.S. investment is still being made by U.S. investors, a dynamic that’s unlikely to change.

Also participating the event were NAI Global president Jay Olshonsky, who moderated the speakers, and NAI Hiffman CEO Dave Peterson, who welcomed the attendees to Chicago.