Those of us who invest in real estate should listen to industry leaders like Sam Zell of Equity Commonwealth (EQC), Jonathan Gray of the Blackstone Group (BX) and Sandeep Mathrani of General Growth Properties (GGP).
All three spoke this week at New York University's annual REIT Symposium, and while I didn't attend in person, I spent a good deal of time reading online wrapups and commentary from the event.
Here's what these three real estate titans had to say:
Zell: I Still See Big Economic Problems
Zell, who was a leading real estate investor long before he led a shareholder revolt and took over as chairman of Equity Commonwealth in 2014, made a well-publicized prediction in December about a coming U.S. recession.
Asked about his forecast at the symposium, the executive said: "I didn't think I was that pessimistic. I thought I was realistic.
"I think the United States at the moment is doing pretty well, [but] I don't think it's doing as well as the pundits would hope or expect," Zell said. "You have to look at the United States as part of a connected, globalized world -- and the rest of the world ain't doing so terrific. We can look around the world and the first question you ask is: 'Where's the demand?'"
The mega-investor also expressed concerns about debt levels, saying the Great Recession served as the first downturn since World War II "where there's more debt in existence [than there was] before the recession. [And] instead of marking to market -- as the world has always done to recover from difficult periods -- we're not marking to market at all. We're just rolling up more debt."
Lastly, Zell talked about what he's done at Equity Commonwealth taking the helm.
"We started with a very simple premise: 'Any day you're not selling, you're buying," he said. "We looked at Equity Commonwealth's portfolio and concluded that a significant portion of its assets were assets we just didn't want to own."
The firm has since sold about half of its portfolio and has been building cash in anticipation of a more-favorable pricing environment in the future. Equity Commonwealth has also been using its cash pile to buy back stock.
Mathrani: All Is Good ... For Now
Mathrani, who serves as General Growth Properties' CEO, thinks things are fine for 2016 -- but not necessarily beyond that.
"If you're in the A-class mall space today, there is still tremendous demand for space," he said. "Rents are still growing with positive double-digit spreads, [and] we don't see a slowdown in 2016 of the fundamentals.
"That being said, I think we'll see a mild recession post the election cycle in 2017 going into 2018," Mathrani warned. "So, it would be wise for us to plan our balance sheets for that to occur."
The CEO also believes retailers are rethinking their growth policies -- a move that's impacting mall-vacancy rates. He said many chains had previously chosen to grow primarily by opening new stores, but are now looking to simply run existing shops more efficiently and profitably. Mathrani said that's leading to fewer store openings, coupled with the closure of less-productive shops.
Gray: Fundamentals Still Look Good
Jonathan Gray, who's Blackstone's global real estate chief, shares many of Mathrani's views -- and given that BX is is the largest private-equity property owner, investors should take his opinions seriously.
"We recognize there's been a moderation in growth and value, but the good news is the real estate investment world is still a very big place," Gray said. "The fundamentals are still pretty good, and we're still managing to find opportunities."
The executive added that he doesn't expect a merger wave to hit the sector despite REIT prices' recent dip. Gray said the pullback is too insignificant and short-lived to matter. He said REIT prices would have to trade at a deep discount to net asset values before we see significant merger activity in the segment.
The Bottom Line
To me, all of the above comments add up to a real estate environment that's late in the cycle, but not at the end yet.
So, I'm not looking to sell any of my big three real REIT holdings: Equity Commonwealth, Colony Capital (CLNY) or Brookfield Properties (BPY). But the three executives' thoughts will make me slower to pull the trigger on any "close calls" when it comes to making additional REIT purchases.
It's also worth noting that Zell used his remarks to run down the world's shortest investment checklist:
- Do I want to own this?
- Where is the demand going to come from?
Answer those questions honestly about every investment that you're considering and you might well improve your returns!