I had the opportunity to interview Sam Zell last week on an iGlobal podcast. You can see it here. Fascinating. Okay, Mr. Zell might not be the undisputed master of 1.4 billion souls whose thoughts are obligatory reading, but his Thoughts should be accorded considerable weight by us denizens of the US economy. There’s a real difference between those who bloviate for a living (which would include me) and those who actually deploy capital based on their views and analysis of markets. I’ll pay considerably more attention to the latter.
Mr. Zell had a lot to say. He, like many of us, is a bit gloomy about the state of our Union and the self-absorbed, reptilian brained, truth-challenged fabulists who inhabit our political swamp, and was considerably more upbeat about the ability of our economy to rebound. Is this a V or is it a bathtub? Probably more of a bathtub, he thinks. Next year might feel terrific in comparison to this, in the same way it feels mighty good when you stop banging your head against the wall. Nonetheless, it will be a considerable wait for a month that looks like a month naturally sequential to January 2020.
Mr. Zell’s take on this pandemic-created flash recession? We will recover. Indeed, we are already recovering. Even, as the recovery begins to take hold over the course of the summer, however, many assets and their attendant financing simply will not work. As I discussed in my commentary last week, “Playing with Broken Toys in Coronavirus Land”, this pandemic has accelerated the natural progression of many enterprises along the arc of their economic life from early success to ultimate failure. Ten years in six months it seems. A form of financial entropy perhaps.
Sam Zell is a philanthropist of considerable renown, the possessor of a great strategic mind and overall, a charming fellow. Notwithstanding the latter, he did acquire his epitaph of the Grave Dancer honestly and the genesis of Mr. Zell’s success and fortune was his almost uncanny ability to identify and acquire distressed assets that wouldn’t be distressed forever. Mr. Zell has embraced this epitaph over the years; for perspective go re-read his terrific article in the Real Estate Review called “The Grave Dancer” from 1982. Talk about a track record! Mr. Zell successfully navigated the shoals of The Great Recession (remember the sale of Equity Office in 2007 – one of the largest real estate deals ever?) and seems confident and well positioned for GR2.0 with a wide ranging portfolio of investments across geography and industries, including, near and dear to my commercial real estate heart, the publicly traded REIT of which he is the Chairman, Equity Residential which is the owners of one of the largest portfolio of top quality multi-family properties in the country.
Mr. Zell is watching the market and it behooves us to watch him. After a summer of forbearance, short term workouts and, notwithstanding the efforts of many property owners to continue to stay current and continue to operate in the face of increasingly challenging fundamentals, the denouncement that it’s over and everyone needs to stop pretending and get out of the pool will come sometime this fall. Even as the economy recovers, businesses and properties, as currently capitalized, will fail. It’s sad, but they just will. Right now, in the shock following this flash recession it’s easy to fool oneself that it will end soon and get better. There’s little price discovery and hence sellers can pretend to valuations that are simply no longer accurate. This pricing and valuation gap between potential buyers and sellers will essentially collapse, as it always does, but Mr. Zell thinks it might be Q4 or even Q1 before that happens.
Mr. Zell is sitting on 4.5 billion of dry powder in his Equity Commonwealth vehicle and he’s clearly looking for opportunities. So I asked Mr. Zell to tell me (just between the two of us, of course) what he’s looking at to suss out whether it’s time to release the dogs of war and deploy capital. Sigh, apparently there is no secret codex here (or if there is, he didn’t tell me). Mr. Zell apparently is simply looking at the same data that’s available to all of us. It’s just that he may see things in the data that not everyone does.
So folks here’s a tell for you, keep looking at the data but when Sam Zell starts to invest in the distressed markets, it might be time to embrace that imitation is the sincerest form of flattery.
So I’m certainly going to watch what Mr. Zell and his principal opportunistic investment fund, Equity Commonwealth, are going to do over the next several months. Though I won’t say that I’m looking forward to a downturn, when a downturn becomes inevitable and it is on the immediate horizon, it needs to be embraced as an opportunity. Winners and losers will abound. Money will be made, lawyers will be hired (not at all a bad thing), transactions will occur and innovation will follow. That’s why I started writing about The Liquidating Trust again last week.
Anyway I enjoyed the hell out of interviewing Mr. Zell and I’m surely going to remember what he said.
Access the exclusive interview with iGlobal Forum here. To watch for free, click “Get Access Now,” create your log-in and apply coupon: ZELLATTEND.