Market briefing --- Bob (fast)
Commercial real estate market
Interview: Equity Group Investments---Zell, Sam--Chairperson of the Board
>> welcome back to “world financial report.” what could rising interest rates mean for the commercial real estate market ? our next guest is sam zell. he joins us from chicago. sam zell, welcome to the program. thank you for your appearance. i want to begin with the question of the bubble in the housing market . if you believe such a bubble exists.
>> i don’t think that there is a bubble in the housing market . i think that the housing market is very robust. i think that in the end that the people are opting for putting more money in real estate and so you’re ending up with a higher demand. but i don’t think that this is very significant. and if you compared the cost of housing in the united states compared to the cost of housing around the world, we’re still the cheapest bargain in the world.
>> what is the effect of a possible rising interest rates environment going forward? do you think that some people will be less inclined to buy and more inclined to rent?
>> i’m also the chairman of the board of the largest owner of multifamily housing in the united states. i think that there is very little doubt that rising interest rates will help the multifamily market . if for no other reason, it will improve the buy to rent analysis. think that a rising interest rate market generally reflects improved economic conditions in job creation, which is good for the multifamily industry.
>> how high or how quickly, i should ask, how quickly do you that i interest rates will rise?
>> i think that interest rates will rise moderately. i think that, you know, if i were guessing, i would guess that by the end of 2005, the 10-year will probably be 5.95%, something like that. i think on the short side it could raise significantly more just because you can’t have interest rates below the inflation rate for very long without creating a big problem.
>> can you quantify significantly more?
>> well, i wouldn’t be surprised if the―you know, the short term rates went from one to two before the end of the year, maybe even 2.25. i think that could see it at three at the end of 2005.
>> after this what has been called the housing bubble. it is the case that real estate prices have moved up a lot. can you still find office buildings at attractive prices that will enable your companies to continue to grow?
>> well, i think the answer is that, you know, our markets are to vast that there is always opportunity. there is always interesting situations. there’s always scale scenarios that are only available because of scale. so i’m not real concerned about opportunities.
>> ok. let me ask you about too much debt in the u.s. real estate market . do you think that the real estate in general is too leveraged than had that could put us in a precarious situation if the recovery falters?
>> i think that you have to distinguish between debt in the commercial market and debt on the single family market . obviously i know a lot about the commercial side, and i would tell that you the commercial side is less leveraged than it has been in a long time. and that’s why we came through the recent difficulties with little or no problem. on the single family side, again, if we’re having rising interest rates, that means that we’ll have higher employment and people getting raises, and so i’m not really expecting any difficulties that the side of the ledger either.
>> help us understand to what extent real estate surprise been influenced by the very low mortgage rates and interest rates that we have been seeing. they talk about oil price being a certain amount a dollar a barrel higher. take us through that in real estate. are real estate price as certain percentage higher because of the artificially low, if you will, or historically low mortgage rates or interest rates?
>> well, there is no question that the availablity of low interest rate financing influences the pricing of any commercial asset. in this case real estate. i think that there―that we have seen cap rates -- capitalization rates go down as interest rates have gone down. on the other hand, you’ve got to be careful that you don’t buy that correlation too strongly. historically we have other anomalies. when interest rates are at 21.5%, regional malls in the united states slow at the lowest cap rates in history, because people expected a lot of inflation. i think that you always have to look at cap rates and pricing against future expectations. and i think that it is likely that we will see more inflation in the future. and i know that in the last 18 months that we have seen a significant rise in the replacement costs.
>> as you know, your name is often preceded in print by the words billionaire finance year -- finance year. do you have a philosophy. what can you tell us?
>> i think that at vareying times in my career―varying times in my career, i have dealt with varying metrics. but the only metric that has been consistent is replacement costs. and to the extent that i have always tested my decision make and my investment make against replacement costs, i think that has protected me. and probably been a very successful methodology.
>> our thanks to sam zell for joining us on the “world financial report.” when we come back, our next guest manages $14 million in emerging bonds. we’ll talk to him after the break.
