Zell, Linneman Offer Unsparing Views in ULI Keynote

By Paul Rosta, Senior Editor

Two of commercial real estate’s leading provocateurs kicked off the Urban Land Institute’s spring conference Wednesday with frank, witty and frequently caustic perspectives on the state of the industry and of the nation.

Sam Zell, chairman of Equity Group Investments, and economist Peter Linneman, a professor of real estate finance at the University of Pennsylvania, teamed up for an informal conversation heard by more than 1,000 real estate professionals at the Hynes Convention Center in Boston. Referring to his nickname of “the Grave Dancer,” the famously irascible Zell professed to see few opportunities for upside. First, Zell mentioned hotels, a property type for which, he noted, “you mark to market every night.” The second category he referred to as “all this crap that’s in all these little banks all over the country.”

Speaking more broadly, Zell added, “Our focus has always been taking on very hairy projects. The hairy projects ain’t happening.” Instead, Zell views emerging markets as the primary source of promise. As an example he gave Brazil, where Equity Investments ranks as the largest real estate-related investor as well as its largest owner of shopping centers.  Sales for the firm’s shopping center portfolio increased 12 percent year over year in 2009—an indicator primarily of market expansion, he said. Still, he acknowledged that emerging markets often require a tradeoff between opportunity and transparency, or, as he put it, “the rule of law.”Asked by Linneman about investment prospects in Western Europe, Zell described it as an attractive tourist destination but a poor choice for growth-focused real estate investment. “I don’t see any future for it, other than as Disneyland,” he quipped.

Commenting on the prospects for the U.S. economy, Linneman found some cause for optimism in faster-than-expected employment gains. “If jobs rebound,” he explained, new households “are going to form pretty fast.” He also offered a relatively positive outlook on the multi-family market, citing the availability of 10-year financing from Fannie Mae and Freddie Mac. Regarding the dire financial straits of the nation’s governments, however, Linneman was far more pessimistic: “I don’t see a way out of the (federal) budget deficit. … California is hopeless.”

Zell and Linnemann both had harsh words about the Obama Administration’s financial and economic policies;  tongue only half in cheek, Linneman expressed “remorse” over casting his presidential ballots first for George W. Bush and then for Obama.  For the first time ever, Zell contended, the Obama Administration policies are creating a business climate in which there appear to be no rules. Moreover, Zell said that he sees unsettling parallels between the declining Roman Empire and the United States today:  excessive consumption of water and fuel at home, overextension of the military abroad.

In conclusion, Linneman asked Zell whether he still regards himself as an optimist about the country’s future.  Zell could offer only a qualified “yes” in response: “I continue to be an optimist about the U.S., if for no other reason than I think we’re going to alter the current political situation.”