Sam Zell Warns On Frothy Real Estate: In Past Five Years We Have Done Nothing But Sell

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Apr.30 — Sam Zell, Equity Group Investments founder, and chairman, discusses where real estate valuations are headed (hint down), the overexpansion of industrial and office space (he is concerned about where the buyers will come from), and his concerns with regulation. He speaks with Bloomberg TVs Erik Schatzker from the Milken Conference in LA. See video and partial transcript below

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There is a ton of capital a tsunami if you like chasing too few opportunities. That's the way it feels. Does it feel that way to you? Absolutely. From our perspective how the stock market despite all of the gyrations is still at an all-time high. Real estate is priced to perfection. I don't see. You know I am you know a bit like that old Wendy's commercial Where's the beef. I just don't see it. And I think it's a very challenging situation one that requires discipline, so discipline to be a buyer at the very least. Is it better to be a seller than a buyer right now? Well I'll give you an example five years ago we took over a reit that we thought had been mismanaged and it was about a 7 billion dollar company. And since we took it over, we've done nothing but sell. Today we have three point two billion in cash and committed, and we're just sitting there waiting for the world to come to us. What's this REIT? Equity Commonwealth. In New York Stock Exchange sells for. I don't know. Thirty-one dollars. It's got about six to seven dollars in cash. It's very hard to sit there and not pull the trigger, but it's the guys who don't pull the trigger around to pull it when it works. Are you selling other things? I think the answer is that we made some sales but generally speaking the place the places where we think pricing is really out of line. We've reduced our exposure. And where would those places be?

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Well, real estate, in particular, was difficult. Well I mean you know we just finished 2010 17 we built 500 Navy 7000 new multifamily units. The last time we did that was 71, and in 71 we were quote-unquote creating an apartment industry in this country. That's a lot of units in Chicago think we're adding 20 percent to the number of hotel rooms. Same true in a lot of other places. Right now you have the beverage that everybody is excited about is distribution. And know it's Amazon and all that. For bhajans yesterday I'm sorry we're largest the largest gap. My guess is that gap. You know it's getting too exciting, and we're building too much industrial space, and you need to remember that ultimately in the beginning industrial space was built and owned by insurance companies because it required the least amount of skill in order to succeed. I think that that got a lot of people owning a lot of industrial space today. And I'm not sure there are enough tenants office space. Just look at what's going on in New York with hats and the arts Chicago San Francisco. We're adding more office space and I don't see the demand. How long do you think it's going to be set before you feel comfortable committing capital again in some of these areas to your description of an oversupply. I think the answer is that you know we need to have somewhat of a market clearing. We're a long way from that at the moment. But when it starts it likely happened relatively quickly.

I don't think I can give you a timeframe but there's a lot of stuff under construction when that finishes. That's you know like draining the swamp and you'll find out who's got tenants and who doesn't. And that's when you see the beginning of the alteration in the existing supply and demand situation.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver