Zell, Mack Talk Leverage, Recovery at Schack REIT Conference

In an annual REIT conference sponsored by New York University's Schack Institute of Real Estate, Sam Zell and William Mack offered several hundred real estate professionals and NYU students their views on leverage, consolidation and the industry's uneven recovery.
Sam Zell

Straight talk on the real estate industry’s outlook from two of its eminent investors capped last week’s annual REIT conference sponsored by New York University’s Schack Institute of Real Estate. Speaking in separate one-on-one conversations, Sam Zell and William Mack offered several hundred real estate professionals and NYU students their views on leverage, consolidation and the industry’s uneven recovery.

Zell swatted away baseless optimism during a half hour of frank and sometimes salty remarks. “In terms of sales, in terms of velocity, our industry is extraordinarily constipated,” the Equity Group Investments chairman said. The pretend-and-extend strategy, he argued, has only delayed a reckoning: “When you pretend and extend and nothing happens, you’re up a creek.” Reducing the leverage that still burdens the industry in many quarters will take another three or four years, he predicted.

Trimming the industry’s debt load is a prerequisite for increasing the flow of initial public offerings. “I don’t see how you’re going to get any kind of effective public execution until the industry as a whole is a lot healthier,” Zell contended. An improving market will also speed up the pace of mergers — a topic on which Zell himself is in the spotlight. On Wednesday, Equity Residential said that it had struck a deal with Bank of America and Barclays PLC to extend the exclusive negotiation period for buying a 26.5 percent stake in Archstone, one of Equity Residential’s chief competitors. That new deadline is May 21.

Zell’s interviewer, attorney and merger specialist Robin Panovka of Wachtell, Lipton, Rosen & Katz, asked for further comment. “Archstone is an extraordinarily attractive portfolio of apartments,” Zell said. “We have been involved in a process. That’s all you’re going to get out of me.” However, some audience members noted that the previous panel on REIT consolidation and globalization was missing an announced speaker — Equity Residential president & CEO David Neithercut.

Earlier in the afternoon, AREA Property Partners founder and chairman William Mack sat down with Panovka to take the pulse of the industry. Asked about the importance of geographic and market diversification, Mack replied, “I don’t think it’s time for REITs to venture out into five different product lines in fifteen different countries.” He cited studies indicating that shares of single-focus REITs tend to trade above net asset value, while their more diversified counterparts often trade below NAV.

Mack also offered perspective on the major property categories, which he variously described as bumping along the bottom of the market or beginning to experience slow growth. Multi-family, he said, remains the “bright star” of the industry, and can look forward to a long stretch of growth: “I think multi-family probably has legs of five to seven years — if we don’t screw it up the way we usually do.” Pressed by Panovka about possible hazards of overbuilding or overpricing, Mack predicted that stricter underwriting by lenders would help keep a lid on excess.

By contrast, Mack termed the office market “spotty.” Existing inventory can fill much of today’s demand, apart from notable exceptions like San Francisco, Washington, D.C., New York City and Boston. The business side of the hotel industry is picking up, but leisure travel will take several years to come back. Retail is doing best today in major cities, mixed-use settings and those catering to niche stores. However, the retail recovery remains uneven, and some B malls are in danger of going out of business. And the industrial sector, which took a smaller hit in the recession than most other property types, has “bounced off the bottom” and is making slow progress, Mack said.