Monday, April 19, 2010

How did I miss this one? Sam Zell at ULI

This post is a mix of politics and real estate.  I usually do not talk much of the former on the blog, but I feel impelled to do so today.  So stop reading now if you are not into that.

I usually watch Sam Zell's thoughts on the market carefully because I have a theory that you should never bet against Sam.  But I blew it on this one, until now, as I missed what he had to say at ULI last week.

Per NREI, Mr. Zell remains bullish on the US markets. But here is the quote: “I continue to be an optimist about the U.S., if no other reason than I think we are going to alter the current political situation. If the current political situation is indicative of the next half century, I think we’re screwed.”

Screwed? Wow. It is no secret that Zell has been a critic of President Obama. Check out this juicy statement in Crain's: "Zell said he saw similarities that are "a little eerie" between Nero's Rome and the United States of 2010."

And then to what he sees as the way to go? Distressed debt. Make sense. "I don't see any great equity opportunities on the real estate side in the United States. All of our activities have been in buying distressed debt in one form or another."

That said, I think equity deals can also make sense if you are buying at a good enough discount to value.  And Zell thinks hotels may be where to invest right now.

But let's go back to the above.  What scares people?

Taxes. A lot of people are frightened about tax hikes, which will be inevitable given increases in deficits and spending and government.  The carried interest tax (a/k/a the developer-killer) is the scariest one. There are probably as many ways to find loopholes as there are tax lawyers, but I think dirt people would rather just be building than worrying about how to create a ultra-complex structure to cut down on tax.  And then you have capital gain hikes as well, which may lead to more 1031s and other structuring issues.And then there is the possibility of a VAT or other additional taxes that will hit hard on --well, those who otherwise have the coin to put into dirt. Instead that cash may go to Washington.

Regulation. Again, it is the unknown.  What is going to happen in that realm? I'm even worried about the seemingly impregnable medical office market because we don't know what health care reform means for doctors other than many of them are sadly abandoning private practice to become hospital employees.

I'm sure his critics will say that Zell just sounds like a disgruntled Tea Party member. I don't think so. From talking to average people on all sides of the political spectrum, I think it is more a fear of big government that has a lot of people upset. And most of them, in my opinion, do not feel they have a political party that will truly represent their interests. I for one feel that if we just elect a ton of Republicans in November we will throw one set of rascals out and put another set of rascals in.  I have to wonder if the real solution is the demise of the so-called privileged political class and the institution of true citizen politicians who do the job for a few years and go back to their real jobs.

We get these anti-government sentiments historically and in the end they do not lead to much change. And that may happen here, especially if the economy goes in the direction most economists seem to think it is going.  (I know this -- stimulus money seems to be involved in every road project that messes up my driving to and from Chicago!)  Whether this sentiment will be fundamentally different remains to be seen, but November is coming. And we'll also see what if anything all of this does to the real estate market.

1 comments:

JimL said...

From my following Sam Zell's history, I think he's more of a harvester than a builder. Thus, if he is sour on Obama & Co, perhaps that tells us that the time of harvesting without building may be ending. That's good for the USA.

The other part of this is that the deferred maintenance of our public infra-structure and public institutions has come home to roost. Continued taxing at below the rate of maintenance causes us to steal from appropriate funding sources to pay for those needs not supported by funding sources--a sure recipe for decline.

Sam Zell, your time has come and gone.

 
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