On May 5, 2004, Kellogg real estate students had a rare opportunity to discuss industry trends with one of the world’s foremost real estate entrepreneurs. Chicagoan Sam Zell, who is Chairman of Equity Office Properties and Equity Residential Properties, the country’s two largest owners of office and apartment space, joined colleague Gary Garrabrant (CEO,Equity International Properties), Dean Emeritus Donald Jacobs and approximately 25 students for an informal discussion.
Zell opened by describing one of his most exciting current ventures. Two years ago, Equity International Properties invested in Homex, a Mexico-based developer of single-family homes. “I was fascinated by it,” said Zell, “because there is unlimited demand for entry-level housing in Mexico.” The homes, which take about five weeks to build, sell for approximately $20,000, and are 95% financed by government-issued mortgages. Last year, Homex built 13,000 homes, with revenues around $300 million. This year, Homex anticipates doubling its production. Zell plans to take this business model elsewhere in Latin America, and Homex recently began trading on the New York Stock Exchange. After this introductory discussion, Zell opened the floor to questions. In addition to a dry wit, his answers revealed an uncanny knack for reducing business to its fundamentals. “No one ever went broke making a profit,” Zell remarked, quoting legendary Wall Street financier Bernard M. Baruch. He followed with several of his own insights. On breaking into real estate: “Easy access to the industry is over,” Zell noted. “Today the people who work for me are infinitely more financially astute than they were 20 years ago.” He advised students to get a few years of “core experience” instead of starting out on their own. On choice of career paths, Zell commented, “I would be much more of a bull on mechanics and finance over the next 10 years, and less so on development.” On valuing properties: “The biggest fallacy is that comparables matter. That’s how tech stocks got as ebullient as they did in the late 1990s. There has only been one metric that has been entirely consistent through my 40 years of experience—replacement cost.” On moving jobs offshore: “The probability of doing anything about outsourcing is unlikely. It’s all out there already. The bottom line is that a start-up company can’t get funded without an offshore base. It’s a fact of life you have to fit into your assumptions.” On industry outlook: “The overall fundamentals of our business look extremely positive going forward. The underlying economy is roaring. It’s much better than the newspapers tell you it is.” On the Chicago market: “We have an overabundance of office space. I wouldn’t go out of my way to buy an office building in Chicago today, and I don’t see Chicago becoming healthy again for another two years.”
Zell also offered some shrewd investment advice. First, “Efficient markets are your enemy. Look for inefficient markets, because they lead to exponential opportunities.” Second, be mindful of lifestyle trends. Zell pointed out that one of the most significant economic trends during the last 25 years is that Americans are now getting married 10 years later than in previous generations. As a result, the attraction of top cities is even stronger, and “where the people are, is where the jobs need to go.” Zell added, “This has enormous implications for real estate usage.” Before concluding the Q&A, Zell explained why he still finds the real estate business as exciting as he did when he began his career: “When I was younger, I was an extraordinary Monopoly player, and real estate is still Monopoly .”