Sam Zell On Commercial RE In NY, SF, Seattle

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Billionaire Investor Sam Zell spoke with FOX Business Network’s (FBN) Maria Bartiromo during Opening Bell with Maria Bartiromo in a wide ranging interview about the Federal Reserve, the stock market and growth sectors in the economy. Regarding the Federal Reserve, Zell said, “I just do not know whether the Fed has the guts to really complete the taper” and that the tapering won’t “be over by October.” Zell discussed the stock market saying, “I think the stock market is over exuberant” and “I think that the stock market reflects the fact that there’s very little other options” for investors. When asked about international investments Zell said, “We have invested very little in Europe” and that “Mexico is one of the places that we’re very excited about.” Zell also commented on the commercial real estate market saying, the hot markets are “San Francisco, New York and Seattle.  Those three markets have pricing that’s very different from the rest of the country.”

Sam Zell On Commercial RE In NY, SF, Seattle

Excerpts from the interview are below.

Sam Zell on the taper:

“I think that, first of all, I am skeptical about, ‘the tapering process.’ I just do not know whether the Fed has the guts to really complete the taper.”

On whether he thinks the taper will be over by October:

“I do not think it will be over by October.  I am encouraging by Stanley Fischer’s presence, who I think is a terrific, terrific addition to the Fed.  But I do not think that the Fed will be able to end tapering as quickly as they thought.  And I think the potential for inflation in a QE2 environment like this is very high.  And as far as interest rates are concerned, it is pretty easy to say they are going up when they’re at zero today.  But it is hard for me to imagine that you are going to have a scenario like this without it having a very negative impact on our country.”

Sam Zell on real estate and housing:

“I think that the single family market is, I don’t know, benign would be a good way to describe it.  The traffic is relatively slow, certainly at the first home buyer level.  As a matter of fact, most of the traffic between the top and between the very top and down is down.  So, you have a whole issue here of how is our society changing.  Are we de-suburbanizing?  Is the focus coming back to urban and higher levels of density?  And I think that’s partially what’s going on.  I think at the same time, you know…buy a house and it will go up in value has been destroyed… And so the result is the urge to commit is dramatically less and if you add in the deferral and marriage you’ve taken six or seven years of prime home buying years out of the equation.  Now, will it catch up?  Remains to be seen, but I think that the Kumbaya, over-enthusiasm about this “massive housing recovery” is nothing more than a good song.”

On the reason housing prices are up:

“I think prices are up because there’s not a lot of supply and I think that mobility is down and when mobility is down, that means that houses don’t move because people are concerned about moving.  When you cut it all to the very chase I don’t think there’s any other explanation than we’ve created this environment of uncertainty and that environment of uncertainty translates into everything.  And it for sure translates into 30-year commitments on mortgages and stuff like that.”

On the commercial real estate market:

“I think that the commercial real estate market in the country is relatively speaking bifurcated.  Not only is it bifurcated between the coast and the center, but it really has two, maybe three really hot markets:  San Francisco, New York and Seattle.  Those three markets have pricing that’s very different from the rest of the country.  It doesn’t have occupancy that’s different, but it has pricing that’s different.  And so I think that the spread between the coasts and the center have now gotten to the point where I think it’s very similar to in the ’70s when American Airlines moved out of New York.  The spread between New York and Plano, Texas, was so significant that they were forced to make a decision.  I’m not predicting anything of that nature, but the spreads are really getting significant and I think that historically whenever those spreads have widened to this point, it’s led to a recovery or improvement in the center as the cost differential forces people to make decisions.”

On the stock market:

“I think the stock market is over exuberant… So the answer if you gave me a choice between buying into it or selling into it,  I think probably selling into it is probably a better perspective — a better reflection of my perspective, but I think that the stock market reflects the fact that there’s very little other options… And there’s no income alternatives and so people continue to increase their exposure and I hope it leads to a happy ending.”

On whether he is optimistic we’re going to be able to finish QE:

“I’m worried about whether I’m young enough to be around when QE3 ends.”

On whether rates will go higher in 2015:

“I don’t think I could make an accurate prediction.  I think that there are so many factors externally that could dramatically impact the cost of capital, but it’s very hard to predict when, but it’s pretty easy to predict if. “

On immigration:

“Well, to begin with, I just don’t believe that you can have an underclass of 12 million people in this country who, by virtue of a historic event, are noncitizens…They pay no taxes; in many cases they’re discriminated against and it’s un-American and it’s crazy and, yes, we made a mistake many years ago by not patrolling our borders.  The world has changed a lot since then, but the reality is 12 million people in the United States are part of our society.  We need to incorporate them into our society.  We need them to get a direct path to immigration without deportation or some ridiculous Rube Goldberg structure.  The answer is these people ought to know that five years from now or whatever it is, if they do. A, B, C, D and E and they stay out of trouble, they can become U.S. citizens.  And I think that would be terrific for our country.”

On the GOP possibly taking over the Senate in November:

“Well, I don’t think there’s any question that a change in the Senate would change Washington and would change the way President Obama’s last two years in office.  President Obama, to the best of my knowledge, has never vetoed a bill and he’s never vetoed a bill because the Senate has protected him from having to make public decisions.  A Senate controlled by the Republicans would force Obama to veto and, as we know, Obama’s a law professor; he doesn’t make decisions.  He just gives different points of view.”

On whether vetoing tax reform would be bad for President Obama’s legacy:

“Well, that’s somewhat of a challenge, isn’t it?  I think that would be a great challenge for Mr. Obama to have to deal with…. he’d have to deal with a track record rather than a speech.”

On the outlook for the next two years for President Obama and his administration:

“The very things that you’ve just described are basically the politicization of news events and the answer is that that’s not what we elected a president for.  This isn’t all about spin.  I don’t know anything about this soldier who came back, but before the President of the United States, you know, started yelling Kumbaya on national television with his parents, he should have known a lot more about the situation and decided whether that was appropriate.”

On Europe:

“I think Europe has had an ongoing shortage of demand.  I think that, you know, that the highly socialized system doesn’t work too well when there’s not external demand to make it work.  And I think it’s — I think Europe is less dangerous than it was a year or two years ago, but the real question is not will it be OK.  The real question is will there be any growth?  And it’s hard to make a case based on what we’re seeing.”

On whether there are opportunities for him to invest in Europe:

“I’m sure there’s opportunity everywhere at any time.  We have invested very little in Europe simply because we think the overall general set of things is not conducive to economic growth.”

On Mexico:

“Mexico is one of the places that we’re very excited about.  We think that it’s kind of a, you know, be careful what happens. I think Fukushima is the biggest thing that ever happened to Mexico, meaning that it — the nuclear accident destroyed the supply chains and resulted in a lot of companies saying we can’t be dependent on only one Asian supply chain.  And the natural place to create the second one is in Mexico and that’s happening as we speak.”

On whether he still likes Mexico:

“Oh, yes, very much so.  And I also — we’re also very involved in Colombia, which we think is — has got great prospects.  It’s a huge beneficiary of the U.S. free trade agreement.  It’s stable, it’s growing.  Its oil production has multiplied by five, eight times in the last 10 years.  It’s got a great future. And the one that’s really intriguing, you know, I don’t know the answer to, is India.”

On whether the World Cup being in Brazil will move the economy:

“Unlikely to move the needle as to the economy.  I think the big question is can Brazil afford the costs involved in putting this on and the Olympics within a two-year period of time?  I’m not familiar enough to know the economics of it.  But it’s pretty scary when the overall population is not as supportive of this as the events require… remember when Colorado was awarded the Olympics and turned it down?  That was a brilliant move by Colorado because you’ve got to have complete support in order for something like this to work out.”

Sam Zell on investing in Brazil:

“Well, it’s changed quite a bit.  But I think the biggest change is that when we went into Brazil 10 years ago, we had almost no competition and it was wonderful.  And we did great.  Then everybody came and joined us and the opportunity dissipated.  Then everybody left.  And today, although the country is not growing as rapidly as it did, the number of competitors that we have for investing capital in Brazil has shrunk more than the growth of the country.  So overall, I think the balance is still a great opportunity.  You’ve just got to have patience.”

Sam Zell on inflation:

“Well, I have been very concerned about inflation ever since everybody decided that they shouldn’t be concerned about it.  I think the big thing with inflation is that, it’s a lagging effect.  I mean, in the late ’70s, when inflation was 13 percent, real estate was flat.  Five years later, real estate shot up; it spiked.  And it was basically the inflation of the late ’70s that pushed up the prices in the early ’80s.  When you look at food, energy, for some reason or other, we keep putting out these numbers where we say the inflation rate is X less food and energy.  That is like saying we are going to live, but we are not going to breathe.  Where food and energy are a critical part of everybody’s daily life.  And when you start looking at disposable income and the impact of rising gasoline prices, the impact of rising food prices, I think these are very real items.  And I think that we have much bigger inflation potential risks than I think the Fed really takes into consideration.”

Sam Zell on where he sees opportunities to expand through deals:

“I think generally speaking things are pretty pricy right now.  And consequently I don’t think that any “big” acquisitions are likely in our world.”

Sam Zell on opportunities for more growth on energy side:

“Yes.  I think that the energy arena in this country is very exciting right now.  I think that if I were to place a bet anywhere, it would be on natural gas.  And I  think the bet on natural gas is the U.S. natural gas slowly approaches the world market as we begin to export natural gas.  I think that would be terrific for the energy resources and energy exploration in the United States and I think that having the lowest cost of natural gas in the world is not necessarily a benefit to us.”

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