At Landlord Summit, Grim Prognostication: Commercial Real Estate at ‘Darwinian Point’

zell getty At Landlord Summit, Grim Prognostication: Commercial Real Estate at Darwinian Point“We’ve reached the Darwinian point,” intoned Sam Zell, chairman of Equity International. “I think that the small guys have to die, and the definition of ‘die’ is they’re going to go private.”

The gnomic Mr. Zell was referring to REITs, or real estate investment trusts, the publicly traded real estate companies that, according to the National Association of Real Estate Investment Trusts, number 170 on the major stock exchanges. Mr. Zell, in goatee and collarless shirt, was sitting on the dais in The Pierre Hotel’s opulent second-floor banquet hall between Steve Roth, chairman and CEO of Vornado Realty Trust,  and William Mack, chairman of Mack-Cali. They were the star attraction at the NYU Schack Institute of Real Estate’s 14th Annual REIT Symposium, this one dubbed, appropriately enough, “Black Swans, Black Holes… And the Light at the End of the Tunnel.”

Before a packed house of mostly men in business suits, the three real estate titans touched on all manner of topics, their sometimes grumpy prognostications veering from the optimistic to the dreary.  The latter sentiment was not surprising. On March 31, The Wall Street Journal reported that REITS continue to get hammered by the credit crisis. As of this writing, Vornado stock was trading at $36.47, an improvement over its 52-week low of $27.01 on March 6, but a significant drop from Sep. 19, when it traded at $108.15. Mr. Zell’s Capital Trust, one of a number of publicly traded companies under the umbrella of his Equity International, was trading today at $1.28, down from a 52-week high of $30.08 last April.  And Mack-Cali Realty Corp. was trading at $19.81, down from its August 52-week high of $43.

The thrust of their comments indicated a belief that the unwinding of the monstrous tangle of debt that got the industry into this mess will take some time, and it will be, for lack of a better descriptive, an interesting process.

“[We] have yet to experience the real values, or distress, on the commercial [real estate] side,” Mr. Mack said.

According to Mr. Zell, “The limited velocity in trading we’ve seen today in the private markets will continue for two to three years.” 

Financing is simply that anemic, and uncertainty abounds in asset valuations. And, while the industry waits for loans and mortgages on assets to mature, much of that debt will trade hands, further confounding the immediate investment future.

“A lot of these loans will be sold into aggressively hostile hands before they get to maturity,” according to Mr. Roth. “And that’s when action will really start to happen.”

On another note, Mr. Roth said that, “This is the kind of environment where the hedge fund industry thrives….We have seen multiple analysts from investment banks hired away by hedge funds because they want to know how to play in these markets, [including the real estate market].”

Will the government’s economic stimulus plans, which include provisions to kick-start the commercial mortgage-backed securities market, do any good?

“We’re throwing a lot of crap at the wall, trillions of dollars, and some of it will stick,” Mr. Mack said. “It’s going to cause some stability at the very least and at the very best, we will have a period of time when we will return to prosperity.” Mr. Mack also said he thought the housing market would bottom in three to six months, and, if we’re lucky, the economy will start improving in 2010.

Thanks to the near-total death of financing, Mr. Roth speculated that said recovery, when it happens, will be equity-driven: “Said another way, if you don’t have equity, you’re dead.”