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Sam Zell with Don Jacobs and Real Estate Club members Photo

Entrepreneur Sam Zell addresses Kellogg Real Estate Club

Kellogg friend shares his rich experience with students

By Chad Schlegel

5/1/2004 - On May 5, members of the Kellogg School's Real Estate Club had a rare opportunity to pick the brain of one of the country's leading real estate entrepreneurs.

Native Chicagoan Sam Zell, chairman of Equity Office Properties Trust and Equity Residential Properties Trust, the country's two largest owners of office and apartment space, joined Kellogg Dean Emeritus Donald Jacobs, Kellogg Professor Tom Lys and some 20 students for an informal discussion of the present and future of the real estate market.

Zell, whose other businesses include real estate finance company Capital Trust, diner reward program iDine and Anixter International, a distributor of network infrastructure products, opened by describing one of his most exciting current ventures.

Recognizing an unanswered demand for affordable housing in Latin America, two years ago Zell partnered with Mexican investors to form Homex, a developer of single-family homes. The homes, which take just over five weeks to build, sell for around $20,000; 95 percent of the selling price is financed by mortgages offered by the Mexican government.

Last year, Homex built 13,000 homes, earning around $300 million; this year, Homex is expected to nearly double its production. Zell plans to take the formula to other parts of Latin America. Homex will be traded soon on the New York Stock Exchange, making it the first Mexican company to go public on the NYSE in 10 years, said Zell.

After his introductory discussion, Zell, who holds bachelor’s and law degrees from University of Michigan, opened the floor to questions from club members. 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 said, quoting legendary Wall Street financier Bernard M. Baruch. He followed with several of his own insights.

Zell on breaking into the real estate business:

"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 those present to get a few years of "core experience" in investment banking or a related field, then join a firm to learn the ropes, instead of starting out solo.

On evaluating property value:

"The biggest fallacy is that comparables matter. That's how tech stocks got as ebullient as they did in the late ’90s. The only metric that has maintained its infallibility is replacement cost."

On the state of Chicago's commercial real estate market:

"We have an overabundance of office space. I wouldn't go out of my way to buy an office building in Chicago today. It's gonna be a long slog. I don't see Chicago becoming hearty again for another two years."

On moving jobs offshore:

"This whole discussion of outsourcing is demagoguery in the extreme," Zell says. The bottom line is, a start-up company can't get funded without an offshore base .... [The United States] has been a major importer of jobs from around the world. I didn't hear anyone complaining when Mercedes brought [thousands of] jobs to Alabama or when the Japanese car companies moved their design studios to Southern California. It's a fact of life you have to fit into your assumptions."

Zell also offered some shrewd investment advice.

First, "Efficient markets are your enemy. Look for inefficient markets — they lead to exponential opportunities."

Second, be mindful of lifestyle trends. Zell pointed out that today Americans are getting married 10 years later than previous generations. As a result, people in their 20s and early 30s are leaving smaller towns and gravitating toward larger cities that offer more social opportunities for singles. That migration has had a major effect on the apartment and office space market.

Zell cited the example of Motorola, which, after developing an office park in McHenry county, was forced to rent office space in Chicago, as potential hires were unwilling to live in, or commute to, the suburbs.

Before concluding the Q&A with students, 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," Zell said, "and real estate is still Monopoly.