We are at Invest4Kids Conference today in Chicago which is a great cause with great speakers – stay tuned for our full notes below readers can find our (not verbatim) coverage of Sam Zell’s always entertaining talk at the conference on the topic of real estate investing. More recent hedge fund conference and letter coverage here.
This industry is projected to double in size from $22 billion to an estimated $44 billion
Michael Mauboussin: Here’s what active managers can do
Views on Retail RE? --> Lots of folks think we're on the back side of the mountain w retail. Online retail represents 8.5% of total retail sales... so ITS VERY EARLY as an impact on retail. It's catching a falling knife, where is the bottom? What is the appropriate cap rate, at top of market the best malls are doing fine. The other side of the coin, the strip center business, the very local businesses, those guys are doing OK. Everything in between is an oxymoron. US has 5sqft of retail per capita vs any other market in the world. Not enough churches. The mall businesses were basically created by SEARS and JCP, needed one as an anchors. When it's all said and done, it's all about traffic. Has learned first hand that you can invest a lot of money but driving traffic is out of your control. Re-rent all you want. People will leaderally drive by medium size malls to go to the fun big one. There's a lot of skeletons out there trading well beyond their intrinsic values. Maybe a couple years left on good leases of retailers that are still in business then a big step down. There's always a price at which it works, but thinks it's a lot lower.
Moderator: Think high end malls are getting thrown out with the bath water. Talmans 6.5% yield ** Stick to A malls, probably over cooked to the downside.
SZ - Retail all about an arb on retailer credit. Still a lot of retailers performing really badly, where will new tenants come from post a wave a BKs in retail. Who's going to fill that space even in the A malls. 1/3 of retailers going away, that's the unknown going fwd. As SEARS and others close up, that traffic goes away. Risk with S/D, too much space continues to pressure FFOs even in class A. Seeing vacancy here on Mich Ave that you've never seen before.
Passive investing influence? --> The growth of ETFs is a very dangerous scenario. Effectively what's happening in RE in particular. Not a company that's not owned 20% by passive. Will negatively impact corp governance, passing control to passive which doesn't care about stock specifics as much as active holders. Eventually something will happen that will precipitate some type of legislation, someone needs to be an owner of these companies. If I was an investor I'd be focused on the degree to which these companies are overly influenced by passive holders. Too many folks that don't take risk just write opinions when it comes to voting services.. ISS, Egan Jones etc. What happens when we have a big downturn, and instread of them buying the dip they sell it out of fear in mass. Price discovery is what capital markets are all about, this is a great way to avoid price discovery.
Investment opptys in RE? --> SZ has been a net seller in this market, hasn't bought much of anything recently. In the last 4 years he's bought nothing major in RE, has liquidated $5b in RE with out a hint of misgiving. Would rather have the pool of cash right now. The supply of capital is way in excess of how it can be intelligent invested. For 4 years we built almost nothing in this country 2007-2010, now seeing a lot of new supply coming on. Not the time to buy. Hudson Yards in NYC, 15m sqft of new space.. no body is looking at the holes that are going to be created when those tenant move there. Where is the demand going to come from to fill those spaces? Cap rates will be impacted by new levels of supply, thus he likes cash right now. It's a nice optionality to have when supply in ramping up. A trophy Hotel in NYC just went up for sale, and no one bid on it.. I think that's a sign. Be cautious out there.
Things don't grow to the sky, we're 9 years into this recovery. Hard to imagine we won't see some alteration in the markets in the near future.