Zell Sees Possibility of “Extra Innings” in Current Real Estate Cycle

REIT pioneer Sam Zell says the latest iteration of the real estate cycle might last longer than usual.

Speaking April 6 at a NYU Schack Institute symposium on the REIT industry, Zell, the chairman of Equity Group Investments, LLC, commented that the “suppression of growth over the last eight years might mean that we play extra innings this time.”

“Corporate America has more capital on its balance sheet than ever before,” he added. “There’s a lot of dry powder.”

Zell also said he has no qualms about potential interest rate hikes because the current low-rate environment imposes no penalty for deferring investment decisions.

Zell noted that he wasn’t sure he sees a direct correlation between higher interest rates and a decline in real estate values.

Jonathan Gray, head of global real estate at The Blackstone Group private equity firm, told the NYU symposium that while he expects to see more privatizations in the REIT sector, any pick-up in activity will likely be triggered by “sharp upward movements in interest rates.”

Meanwhile, Zell said, the residential sector continues to benefit from a number of years of under-building triggered by the financial crisis. Construction of single-family homes totaled about 1 million per year between 1985 and 2005. It dropped to a level of about 400,000 homes at the height of the financial crisis, Zell said. Today, construction stands at about 600,000 homes per year, he said.

“You’d think that after eight years of recovery…that you’d be back to 2005 levels,” Zell noted.