the things though that – that – that seems to be observed now in Washington as we’re – as we’re working through healthcare is that maybe, according to someone like Walter Isaacson who we had on this program, maybe the fever is breaking in Washington Maybe this may be a year where the two sides come together. Do you feel that way at all, Sam?

ZELL: I don’t know what he’s been smoking because nothing I read suggests that. They made a couple of deals on a couple of simple things, but talk to me about immigration. Talk to me about healthcare. Talk to me about foreign policy. There’s so many issues where there’s just this extraordinary disparity between the parties and very little interest in compromise.

LIU: I want to bring back Sam Zell, who’s been standing by. Sam, you think the – you thought the markets were overpriced, right, going into 2014.

ZELL: I did.

LIU: Why’d you think that?

ZELL: Well I think the economic activity did not correlate to the price of the stock market. Stock market was up 25 or – I don’t remember how much it was up last year.

LIU: Like 30 percent.

ZELL: Thirty percent. I (inaudible) companies. We didn’t see any – any Kumbaya happening. So from our perspective it’s a function of too much liquidity.

LIU: So do you feel that this is pretty healthy then to see this – to see this kind of decline?

ZELL: I don’t think declines are ever healthy, but balance is what keeps us in place. And when we get out of balance like subprime loans or whatever, it’s pretty disastrous. So the market has to keep balancing back and forth as consecutive (ph) currents are relevant. And I think the market in 2014 is a lot more likely to reflect what happened in 2014 than whether or not it was up or down in January.

LIU: But does it make you nervous at all, Sam? I know not much makes you nervous at all, but – but seeing how volatile these markets have been over the last few weeks, does it make you more nervous that Americans are going to look at this and pull back and perhaps they may not be buying as much anymore? They may not be selling as – as many houses or buying as many houses.

ZELL: The market went up 30 percent last year. Did the American people buy everything in sight? No. So what’s the relevance now? I don’t think the market has a dramatic impact on buying and selling decisions unless it’s such a prolonged period like we had in ‘08 and ‘09 that it really dampens everything.

LIU: It was so overwhelmingly essential. Where – where – where do you stand now on real estate? What’s your outlook on real estate now?

ZELL: I think you have to distinguish between commercial real estate and residential real estate.

LIU: Okay, residential? I know you were big on —

ZELL: Residential single family I think is going to be benign. I don’t see any massive recovery. I don’t see any massive rise in prices. I also don’t see any significant downturn. The demand for single family houses is to my judgment relatively muted. We’re producing about 700,000 or 800,000 new units a year, down from about 1.2 million in what was considered to be a normal year.

LIU: But Sam, I thought there was going to be this huge trend – and didn’t you and I speak about this before, these – the generation Xers who were sick and tired of living in their parent’s basement and they were going to start to buy these starter homes. Where’s that trend? Why hasn’t that gotten bigger?

ZELL: Because those people don’t want to live where their parents used to live. They want to live in a city. They want to be in a 24/7 place. They want to be where all the action is. That’s not in bumble something (ph) out there where they used to build all these ticky-tacky homes. So part of the demand issue is the shift from – to more urbanization in the United States, therefore changing housing patterns. And 15 years ago somebody would graduate with an MBA and the first thing they wanted to do was buy a house, get in on the track. Now they defer marriage, they defer buying a house, they defer everything to basically maximize their lifestyle.

LIU: Right. And that’s why you’re going to urban markets, right?

ZELL: Well we’ve over the last 20 years taken Equity Residential from basically a suburban garden apartment owner to a barrier to entry 24/7 city highrise provider of housing.

LIU: Higher interest rates. Do you believe that’s going to – that’s going to scare off any buyers or are we prepared for that?

ZELL: Again, depending on whether you’re talking about commercial or —

LIU: Residential.

ZELL: On the residential side, I think affordability is still tight. I think interest rates going up will have a slight negative effect, not a catastrophic effect. On commercial real estate, I think unlikely to have too much of an effect.

LIU: Sam, why do you say that – that there are too many REITs out there? You said something before I believe in a speech that there – that there – we’ve got actually a saturation of REITs. What do you mean by that?

ZELL: What I mean by that is at the last count there are 203 REITs. I think that there are probably 30 of them that have size, scale, market impact, et cetera, and will be leaders and growing in the future.

LIU: Yours included.

ZELL: Hopefully, hopefully. Equity Residential is $34 billion. Equity Lifestyle is $5 billion, $6 billion. So they’re very big companies, but there are also a lot of $800 million, $700 million REITs that have no scale, have no liquidity, and I think only obfuscate the clarity of the picture. And I would expect over the next 20 years we will have more and more consolidation as the REIT industry continues to grow.

LIU: Well then why do you think that they’ve been allowed – why do you think there’s been a proliferation of these then, of these smaller REITs?

ZELL: For lots of different reasons. First of all, real estate is a very attractive asset class. Everybody thinks that their deal is special, their deal is better, their opportunity is better. The problem we have is that if you go public – we went public with a REIT in 1993 for $800 million and we did another one that year for $200 million. And at that time those were reasonable sized REITs. Today anything under a couple billion dollars is not relevant and doesn’t have liquidity. And in the recent, the reason REITs exist is to provide capital to the real estate market. And you can’t provide capital if you don’t have liquidity.

LIU: With me this past hour is billionaire investor Sam Zell, the chairman of Equity Group Investments, a company he founded over 40 years ago. As part of our ongoing series around my new book Work Smarts: What CEOs Say You Need to Know to Get Ahead, I wanted to get Sam’s tips on – on – on the keys to success.

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