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Zell sees mild recession, single-family housing market bottoming
Source: CNBC
The U.S. housing market is nearing its bottom, but the overall
economy is likely to dip into a recession next year, real estate
executive Sam Zell said Tuesday. Meanwhile, office buildings
that are not in downtown markets or that are not considered top
quality will see a slow, downward spiral in prices.
Real estate heavyweight Sam Zell
said on Tuesday the U.S. economy is likely to slip into
recession next year, while the single-family housing market is
close to bottoming out.
But on the downside, Zell, who earned the moniker "The Grave
Dancer" for buying up distressed commercial real estate
properties in the early 1990s, said office buildings that are
not top quality or located in downtown city markets will see a
long, slow downward spiral.
"This is not a time to own commodity (office buildings) in the
suburbs," said Zell, speaking at the DLA Piper Global Real
Estate Summit in Chicago.
"If there's going to be a diminution of demand for office space,
it's going to be out there." The credit crisis has dried up
sources of debt for commercial real estate, which is heavily
dependent on borrowing to fund construction and acquisitions.
($700 billion isn't that much, says Zell, in his interview with
Maria Bartiromo. See video)
This has stalled the construction of new office buildings.
"If there is no new supply, then high quality well-located prime
real estate can only be terrific," said Zell.
"I don't think you're going to see much deviation in cap rates
in high quality stuff," he said referring to capitalization
rates which move in the opposite direction of prices.
However, many second-tier and suburban office buildings financed
with large amounts of debt from 2005 to 2007 may squeeze their
borrowers who are not able to refinance the principal when the
interest-only loans come due, Zell said.
"Will the value of the real estate increase enough so that you
can refinance the existing mortgage?" he asked. "My answer is
not likely. If the asset is high quality, well located, they'll
be salable and the equity is probably recoverable.
If its second-tier stuff, I don't have much prospect for it."
Zell warned of wide repercussions if the U.S. Congress includes
proposals to modify mortgages of borrowers in bankruptcy as part
of a $700 billion federal bailout being hammered out.
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"I think any legislation of any kind that modifies an existing
contract is such a slippery slope that in effect I think it
destroys the country," he said.
"If I can't rely on a contract, I don't know how the system
works." Zell said that high oil prices, the collapse of Lehman
Brothers [LEHMQ 0.225 --- UNCH (0) ], the government takeover of
mortgage lenders Freddie Mac and Fannie Mae , and of insurer
American International Group [AIG 3.31 -1.69 (-33.8%) ] , likely
will kick the economy into a recession.
"Probably not until next year," he said. "I don't think it's
going to be anywhere as near catastrophic as people envision."
But the single-family housing market, whose collapse is at the
heart of the credit crisis, is close to the bottom, he said.
"I would be surprised if we don't see the bottoming out of the
single-family housing market, and I make a distinction between
single-family and condos," he said.
"I really think that next spring is going to be a reasonable
year." |
