Sam Zell was recently interviewed on Bloomberg’s “GO” TV. The beginning of the post are some selected quotes from the interview. I also provide a link to the full transcript.
Wednesday morning, Sam Zell, billionaire chairman at Equity Group Investments, spoke with Stephanie Ruhle and David Westin on Bloomberg’s “GO” TV.
Zell discussed a wide variety of topics from the Federal Reserve rate hike, the risk of a near-term recession, real estate, energy, and various foreign investment ideas. The interview was before the Fed announcement.
I put a spotlight on some interesting Zell ideas. Everything below is a selected quote except for two comments by me in braces[].
Twenty-Two Ideas
It was a fascinating 2-hour interview. I stripped off the intro, the rest appears below. It’s well worth a read.
For the full transcript go here.
The much-publicized EB-5 “Immigrant Investor” program is set to expire this week, putting billions of dollars for commercial development at risk.
EB-5 gives visas to foreign investors who invest $500k in projects that create at least 10 American jobs. When the program first passed in 1990, it required investors to spend $1M but was later adjusted to allow investors to spend half in rural or high-unemployment areas, CNBC reports.
Its popularity has soared in recent years—sparked in large part by Chinese investors, who account for around 90% of all EB-5 visas granted—causing it to hit its visa limit of 10,000 per year in 2013 for the first time. (In 2007, only 700 visas were issued.)
The US Citizenship and Immigration Service estimates that EB-5 has brought in more than $2M and created more than 77,000 jobs, although those numbers are up for debate.
But some are concerned that more EB-5 money is being spent on projects in wealthy areas like New York City’s Hudson Yards or San Francisco’s Hunter’s Point Shipyard.
This week the Securities and Exchange Commission announced enforcement actions against lawyers charged with defrauding the system. A developer was also charged with using $6M from Chinese investors for a building conversion that never happened.
But on the flip side, EB-5 money has been beneficial, with projects like Washington DC’s Uline Arena (pictured), which is being converted into an office and retail center, as part of a project to rejuvenate the entire area.
Angelique Brunner, president of EB5 Capital, says the program needs more regulation so it can focus on the reason it was created, which was to spark economic development in distressed areas. One possible solution is a bipartisan proposal spearheaded by Judiciary Committee Chairman Chuck Grassley and Ranking Member Patrick Leahy. The proposal would increase the minimum investment in rural and high-unemployment areas to $800k and would reserve 4,000 of the 10,000 EB-5 visas for rural and high-unemployment areas. [CNBC]
Source: EB-5 Program Could End This Week – Commercial Real Estate
CIM Group of Los Angeles appears set to build the tallest residential tower west of the Mississippi River. CIM has closed on a $14.5 million purchase of nearly 2 acres in downtown Austin, Texas, the Austin American-Statesman reports.
Along with Constructive Ventures and Aspen Heights, the Mid-Wilshire L.A. real estate company plans to build a 58-story tower. It not only would be Austin’s tallest building, according to the newspaper, the $300 million tower would be the tallest residential building in the West.
The tower, with 370 planned condos, could break ground early next year, the Statesman reports. The site was acquired from the City of Austin.
Source: CIM to Build Tallest Condo Tower in West | Los Angeles Business Journal
LOS ANGELES—Why are sale-leasebacks and build-to-suit deals so popular? According to Andrew White, CCIM, managing director of the western region at Gladstone Commercial REIT, and a moderator at the recent RealShare Net Lease Westconference here, the answer is because “Cap rate spread to treasury is still high.”
The “Opportunities” panel discussed the opportunities in sale-leasebacks and the advantages of build-to-suit developments. Panelist Peter Deltondo, director of Marcus & Millichap Net Leased Retail Group, said that the most aggressive capital he is seeing in this space is from the 1031 buyers. “Most of them are coming out of the apartment sector and they are paying the most aggressive cap rates.” Continue reading “BIG DEMAND FOR NET LEASE PROPERTIES”
America’s busiest ports reported a decline in imports during the key peak shipping season for the first time in at least a decade, sparking fears of a broader economic slowdown in the U.S.
The question is, what does a slowdown in economic activity mean to the economy in general, and real estate in particular?
The Fed surprised markets on Wednesday with their taper head fake. Was it because the economy is booming? No. Was it because household incomes were growing? Not exactly. Was it because inflation is non-existent? Not if we look at rents or medical care. In fact, going through the Fed’s statement it is largely holding back on the taper because of fear of budget negotiations in Congress. That is, we are hitting our debt ceiling yet again and the Fed wants some leverage here. Yet the larger signs all pointed to a taper if we consider that rents are rising at nearly twice the rate of the overall CPI. Also, the Census figures for 2012 were released and household income adjusting for inflation is now back to levels last seen in 1989. Lost decade? Try a lost generation. Also, recent data highlighted that the wealthiest in our country are capturing most of the income gains and given this trend and the Fed’s taper-less September, the feudalism trade is fully on.
Household income
The Fed is the housing market. Investors are dominating the market and this is their number one client. It is no surprise that a moderate rise in rates has essentially clobbered the “normal” home buyers out in the market. Regular buyers need every piece of help buying a home because household incomes have done this:
The above chart shows a full lost decade (24 years of weak income growth). Even in real terms, household income has plunged since the recovery started in 2009:
2007: $55,627
2008: $53,644
2009: $53,285
2010: $51,892
2011: $51,100
2012: $51,017
The Fed is largely playing the market and ironically, these moves are likely to continue the wealth disparity in the US further as investors once again plow into the real estate market to chase yields. For regular households, more income is going to go to housing on the rental front:
Keep in mind that rising rents with falling incomes is not exactly a good combination. Rents are rising at nearly twice the pace of the overall inflation rate. This divergence has accelerated since 2012. The Fed has made a one way bet here. The Fed is operating under a QE forever scenario. Take a look at the Fed balance sheet and tell me if you think a taper is in serious consideration:
The Fed is largely playing one big confidence game. The too big to fail are even larger today. Real estate investors are virtually half the market in 2013. Even in expensive California nearly one-third of all home sales are going to investors (in Las Vegas it is closer to 60 percent).
Reconcile all the facts coming out this month:
-Household incomes adjusting for inflation are back to levels last seen in 1989 (24 years ago – a lost generation)
-50 percent of income generated in 2012 is going to the top 10 percent of earners (highest ever since the early 1900s)
-Rents are rising much faster than overall CPI
-Investors are gobbling up an incredibly large share of all real estate purchases
There has been a serious disconnect going on since the recovery hit and these kind of divergent data points suggest we are in a mania like mode. Investors are largely chasing yield even on many deals that simply do make sense (i.e., cap rates are simply not panning out in many markets). The Fed taper is merely a magician’s trick. The Fed can’t taper to any large degree. It is an end-game in the mortgage market. The Fed is the housing market. The Fed is largely focused on helping member banks so it is no surprise that banks are doing exceptionally well and many financial institutions are the largest real estate buyers in the current market. For now, the investor trade will continue to play out even if people with common sense realize this is simply one giant shell game and the Fed is on its way to a $4 trillion balance sheet. Doesn’t seen so farfetched that we are entering a modern age of feudalism.
Dr. Housing Bubble
http://www.doctorhousingbubble.com/federal-reserve-taper-household-income-lost-generation/?
There have been a lot of doom and gloom articles appearing lately. Should we be concerned? (GA)
By DAVID A. STOCKMAN
New York Times
Published: March 30, 2013
The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid.
Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.
Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.
So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.
When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.
THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.
The housing market continues to face a few trends in 2013. Low inventory, higher leverage because of low interest rates, and high demand from investors. Take for example the share of foreclosure re-sale properties that are being sold. In Southern California, the peak was reached in 2009 at 58.3 percent of all sales. Today foreclosure re-sales make up only 15 percent of all sales. This of course is one reason why the median home price has soared in the last year. With such high demand and low inventory, investors are able to poach high quality properties since coming in with an all cash position is much better than relying on a mortgage which most typical buyers will use. Also, the shadow inventory is being slowly leaked out since there is little reason to flood the market and depress prices. Banks have figured out that frenzied buying and record breaking low inventory is a good recipe for causing prices to jump up. Does distressed inventory even matter in Los Angeles anymore?
Los Angeles Distressed Inventory
One interesting point in all of this is that people now somehow think that there are no foreclosures or that somehow the housing market is back to the days of 2005 and 2006. Let us look at foreclosures in Los Angeles County:
Over 17,000 properties are in some stage of foreclosure in the county. Is this high? Well let us take a look at the non-distressed inventory that is listed in the MLS:
Continue reading “Another Housing Bubble Coming In Los Angeles?”
Los Angeles employers added more positions in the second quarter than during any other three-month period over the last decade — an indication that the county’s economic recovery could be gaining traction, which will support retailers, according to the latest research from national real estate investment services firm Marcus & Milichap. Nonetheless, the return to prerecession retail operations will requires several quarters of healthy job growth before improvements in vacancy and rents reflect the stronger economy. As a result, tenants still hold the upper hand when negotiating new leases in most areas, especially for dark in-line space, where there are far more vacancies than interested retailers. 
The Westside Cities remain an exception due to the consistent demand for space near the coast. South Bay/Long Beach also has a neutral leasing situation as the limited amount of new demand is directed entirely at existing centers. Overall, however, inland operators will remain handcuffed in raising rents, and will instead focus on generating revenue through occupancy gains.
While the large inventory of available retail properties in Los Angeles generally provides investors with several options to acquire assets, the most active buyers are having trouble finding listings that suit their strategies. Many multi-tenant investors are scouring the county for value-add deals in B+ or better locations, but few banks have been willing to foreclose and divest these assets. Instead, lenders will extend loans until a more robust recovery in operations emerges, which could facilitate more refinancing opportunities or elevate the value of the asset before disposition. Some stabilized properties are changing hands at cap rates near 7 percent for anchored product and 100 basis points higher for strip centers. Single-tenant buildings are also changing hands, though the number of prime, long-lease assets available has been limited by the slowdown in construction. When available, a triple-net deal with a corporate-backed lease will trade at cap rates starting in the high-5 percent range, and first-year returns will climb up to 8 percent for local retailers with a proven track record.
Here is a snapshot of Marcus & Millichap’s latest findings on the retail market for LA County:
Employment: Employers will add 52,000 jobs across Los Angeles County this year, expanding payrolls by 1.4 percent. More than 20,000 of those jobs will come in the typically high-paying professional and business services sector, which will bode well for local retailers.
Construction: Developers will add nearly 950k sf of retail space to inventory this year, expanding countywide stock by 0.4 percent. Last year, builders delivered 690k sf in the market.
Vacancy: The pace of store openings will improve in the second half as major retailers position for the holiday season. As a result, vacancy will finish the year at 6.2 percent, down 10 basis points from year-end 2011.
Rents: As owners in desirable areas push rents higher, asking rents will rise 0.8 percent to $28.29 per square foot in 2012, while effective rents climb 1.2 percent to $24.62 per square foot. Last year, asking and effective rents each advanced 0.6 percent.
WESTSIDE REALTY ADVISORS - REAL ESTATE MARKET NEWS 
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