Expectations of an impending crash in commercial real estate that would create bargain-hunting opportunities are “greatly exaggerated,” Sam Zell told several hundred investors Tuesday in Chicago.
“Everyone is waiting for the grave dancer to come and exercise his magic potion,” Mr. Zell said, drawing laughter from the crowd because the moniker is one he took for himself as a buyer of distressed real estate. “But you need two to tango.”
Owners of office and apartment buildings today have no incentive to sell, he said. By 2011 or 2012 they will likely be able to fill their vacancies, albeit at rates 30% below their peaks, because demand will catch up to supply, he said.
Hotels, though, “are in a different position,” said Mr. Zell, who recently raised $625 million to invest in “credit opportunities.” Unlike office buildings, hotels don't have the cushion that long-term leases afford.
The worst “bloodshed” will occur with hotels of “lesser quality” or that have “over-improvements,” and investors will be able to snap them up for 40 to 50 cents on the dollar, he said.
Mr. Zell's comments marked the end of three hours of back-to-back presentations by 11 well-known financiers at the first “Invest for Kids” conference in Chicago. The event, modeled after a similar long-running effort in New York, raised $750,000 for five local child-welfare groups, its organizers said Tuesday.
Madison Dearborn Partners Chairman John Canning drew the biggest laughs with his 15-minute account of the state of private equity, an industry that he said “tried to commit mass suicide and almost pulled it off.”
Banks that were too eager to lend on terms that were too easy contributed to an unprecedented private-equity bubble that popped in July 2007 and is still in the process of deflating, Mr. Canning said.
“Going forward, private-equity firms will have to work for a living,” he said.