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Zell: CRE market to undergo ‘significant change’ soon

Real estate expert Sam Zell has predicted a major shift in the industry amid rising supply and stagnant demand.

Sam Zell made his fortune buying distressed real estate, but the real estate magnate has come across few such opportunities of late, he said at a New York City conference Wednesday.

Echoing comments he made in a PERE interview earlier this year, Zell, the co-founder of Chicago-based Equity International, said that oversupply has started to become problematic for the industry. Adding millions of square feet in New York’s Hudson Yards development, for example, could depress prices for the city’s office market as a whole. Other property types are likewise suffering, with a 20 percent increase in the hotel supply in Chicago that could hurt the local hospitality market.

“The US commercial real estate market has benefitted from a lack of supply, and that’s changing,” he said at the annual EisnerAmper private equity real estate conference. “It’s not changing because of demand, but it’s changing because of the capital available. It’s very likely that we’re going to see in the next 18 to 24 months, if not sooner, a significant change in the dynamics of the commercial real estate market.”

Predicting increasing inflation after 30 years of a downward trend, Zell said development will become less attractive compared with buying existing assets. He also dismissed some technology trends – driverless cars, for example – that others anticipate will transform the real estate industry because of the associated shifts in tenants’ wants and needs.

“The projection when I was in high school was that in the 1990s, we would commute in private jets or flying cars. Anyone making bets on a dramatic technical change in hard assets will be disappointed,” he said.

Despite some dour predictions about the market, Zell overall noted that he sees opportunities in any coming distress, which is how he arrived at his decades-old nickname: the Grave Dancer.

“How can you be a Grave Dancer and not be [optimistic]?” he said.