PERE SUMMIT NEW YORK: Pearls from an old master

Sam Zell has fielded questions from PERE in the pages of multiple magazines over the years, but never in a format quite like the PERE Summit: New York in November. Before the interview, PERE’s 38,000-plus readers, social media followers and industry contacts were asked what they would ask the 75-year-old real estate titan. Graduate students and top global executives alike heard their queries on stage, where PERE’s senior editor, Jonathan Brasse, presented questions ranging from the technical – like how currency fluctuations affect emerging markets investments – to the contemplative, looking back on Zell’s lengthy career. Here is a condensed version of this unique Q&A session.

Jonathan Brasse: Just a week after a US presidential election that surprised many, how should the real estate world interpret Donald Trump’s election?

Sam Zell: I’m optimistic that Trump can make a difference. We in the United States have been through eight years of an attempt at redistribution at the cost of growth. We’re likely to see a reorientation toward growth and a reduction in the regulatory environment. Over the last eight years, the Obama administration has been responsible for 600 additional regulations. Very few of those regulations have contributed to productivity or to growth. I do believe that we’ve never had a king, we’ve never had a queen, and we’ve never had a royal family. The idea that we might’ve had one [with Hillary Clinton] is pretty offensive to me.

JB: Given your Mexican business connections, how much credence are you giving to Trump’s rhetoric to constructing a border wall?

He talks about building a wall. We in turn focused on building a door. We built, on a Mexican-US border south of San Diego, a bridge with full customs and everything. This is the end of our first year, and over one million people crossed the bridge. The world ‘wall’ has all kinds of ramifications to it. Nobody talks about the wall in Israel and yet that wall has dramatically reduced the amount of killing and violence. In the same manner, I think securing the borders is another way of saying, ‘Let’s enforce the laws that exists.’ We don’t need any new laws; we don’t need any new walls if we enforce the rules that we already have.

JB: After the election and the UK’s June vote to leave the European Union, do you expect strong overseas capital flows to continue to the UK and the US?

SZ: I can’t imagine, assuming that the rules stay the way they are, why foreign investment will not continue to flow, both into London and into the United States. I don’t think there’s anything, either in Brexit or in Trump, that will diminish those flows going forward.

JB: How will US property values be impacted by the expected rise in interest rates?

SZ: I happen to be somebody who doesn’t believe we’ve benefitted from these tremendously low interest rates. I think what they’ve done is they’ve eliminated the sense of urgency. Demand is what we have to encourage. We have to encourage it by creating less of a regulatory environment and more of an environment where we enthusiastically support growth. We need a president who stands up and says, ‘Hallelujah, we’re building this.’ That’s where growth comes from. If that demand is going to be there, you don’t need super low interest rates to take advantage of it.

JB: Investors face a lot of pressure not to venture into certain markets. How do you respond to markets that seem off-limits for investment?

SZ: In 1975, I was at a conference like this and a member of the audience asked me the question, ‘Where did you do the best?’ I told him them: Toledo, Ohio. The people of the audience looked at me like I had lost my mind. Someone suggested that it was the armpit of America. Someone else suggested that it made no sense. I said, ‘You make money and you succeed where your competitive position is best.’ I succeeded the best in Toledo, Ohio, because there wasn’t an insurance company or a pension fund that was willing to commit new money in Toledo, Ohio. I earned returns and yields that were double what were earned in major ‘acceptable locations.’

JB: What can central banks do if another recession occurs?

SZ: I’m not sure central banks knew what to do last time, so I don’t know what they’re going to do next time. I think central banks have forgotten what their role should be and have become political and economic animals that, in the long run, are not positive for any economy. Much of the slow growth that the world is dealing with today is the result of central banks pretending and extending rather than allowing reality to govern what happens. We’ve created an artificial environment that’s not reflective of reality, that is kicking the can down the road.

JB: A panelist at a conference I moderated in Munich this fall suggested it’s time to get frank about property use. Ultimately, he said there will be more warehouses, fewer offices and fewer shops. Do you agree with that?

SZ: Absolutely. You think that there are enough churches to fill the empty retail big box churches in America? I doubt it. Yes, the AAA mall is doing fine, yes the strip next door is doing fine. Everything else is obsolete and is being replaced by e-commerce. Anybody who doesn’t recognize that is going to suffer significantly.

JB: What are other game-changers?

SZ: I think the single biggest demographic change in the world over the last 15 years has been the deferral of marriage. I graduated from the University of Michigan in June of 1963 and I was married 10 days later. Within a year, everybody I knew was married and some of them had children. Today, my children and your children don’t even think about getting married until they’re near 30. What does that mean for utilization of real estate? I’m a cynic on the idea that things have dramatically changed. I think the millennials are an interesting group of people. I think they have deferred making a lot of decisions that we made at a much earlier date. Do I think those are permanent changes in our society? I doubt it. I think that anybody who over-invests predicated on millennials is going to be disappointed.

JB: Have general partners been successful enough over the past 15 years in delivering returns in emerging markets to justify the risks implicit in emerging market investing?

SZ: The emerging market question is as yet unanswered. I think we’ve been in an extraordinarily volatile period. If you eliminate the currency fluctuations, emerging markets investments have been actually quite good. They’ve suffered from the fact that we’ve had an extraordinarily strong dollar that’s led to currency volatility and depreciation. I’m not sure the last 10 years are reflective of what the future is all about. In the end the emerging markets is where growth is and will be in the future. We in the real estate business are in the business of supplying the housing for the future of growth. That means that you have to be in the emerging markets.

JB: If you think back to all the cycles you’ve been through, what have you invested in to protect yourself through cycles, and how are you responding to the current cycle?

SZ: In 1973 through 1976, I was the biggest buyer of real estate. I replicated that again in 1989 to 1994. Over the last five to seven years, I’ve been a seller. I’ve continued to be a seller. Accumulation of cash is the way that I would respond to this particular cycle.

JB: What keeps you up at night with worry?

SZ: I worry about the US’s position in the world and the stability of the world overall. At no time in my life have there been as many potential headwinds as I see out there today. How we manage to get through that will determine the future for our children and our grandchildren.