Sam Zell’s Real Estate Outlook: ‘A Tsunami Of Supply’

Sam Zell is a panelist at the Milken Global Real Estate Outlook.

He is very pessimistic on the outlook for real estate.

The main problem is the amount of supply entering the market.

This idea was discussed in more depth with members of my private investing community, Special Situation Report.

I love YouTube. You used to have to attend conferences that set you back thousands of dollars. These days you can watch the leaders in your business on YouTube for free. Sam Zell is one such industry leader you want to hear when you have the chance.

He dominated a panel at the Milken Global conference on the outlook for real estate. In case you don't know; Sam Zell holds substantial interests in, and Chairs, several publicly traded companies including: Equity Residential (NYSE:EQR), apartments; Equity LifeStyle Properties (NYSE:ELS), manufactured home and resorts Equity Commonwealth (NYSE:EQC) an office REIT, Covanta Holding Corp. (NYSE:CVA), operating and owning energy-from-waste and power generation facilities and Anixter (NYSE:AXE) which is in communications and security. Finally, he is the chairman of Equity Group Investments, the private investment firm he started in 1969. Sam Zell is very much a self-made real estate billionaire and isn’t one to mince words. Appropriately he called his recent book Am I Being Too Subtle.

This is a bit of an unusual article. I'll first summarize his key points and subsequently discuss the REIT's that are chaired by him to see if these are positioned in line with his thinking. If they are these could be potential opportunities to ride out the real estate bust.

Zell argues that between 09' and 15' we didn’t build anything. In an unusual turn of events we entered the 08' crisis without real estate being in oversupply. According to Zell usually real estate is oversupplied as we go into a crisis. He actually thinks there is a tsunami of supply coming to market. That's why he and his companies sold $10 billion of real estate in last four years. If they try to sell something now they are waiting and waiting and hope for someone to show up. There’s oversupply in all of real estate. Zell is sitting in cash because the day of reckoning is coming.

Oversupply has brought an end to every real estate cycle. There are a lot of projects coming online. Tsunami. He specifically calls out Hudson Yards in New York with 14 million sq.feet, Brookfield (BAM) with 5 million sq feet and then there's Penn Station being developed.

There's also too much industrial space under construction. Everybody thinks their building is going to be leased to Amazon (AMZN). But if Amazon doesn’t lease it real estate developers will have few options left.

Zell isn't a big believer in self-driving cars but an app called parking hero dramatically affected cash flow of parking structures. TomTom (OTCPK:TMOAF) offers a similar service where the app is able to locate nearby parking space because of big data. This cuts back on the time spent driving around looking for parking spots and decreases the pain for which the parking garage is the solution. This is a big technological disruption that affects cash flow of these real estate structures.

Equity Residential (EQR) is a REIT focused on residential real etate. Its last acquisition dates back to 2013 and since that time it has been selling, selling, selling and returning money to shareholders.

The company describes its balance sheet as one of the strongest in the REIT industry. There's $1.7 billion of liquidity and 34% debt to assets is low. The company sees opportunities to lower its interest rate profile. It looks like Zell is walking the walk here.

Equity Lifestyle Properties (ELS) is a manufactured Home REIT. It owns land and customers put their own properties, like RV's, on the land. As the slide below shows the REIT has very little debt with only 21.2% off total enterprise value. The debt has a very long maturity profile. It looks like it is derisked in terms of balance sheet risk and interest rate risk.

Equity Commonwealth (EQC) is perhaps the most extreme display of Zell's thoughts about the U.S. real estate market. It sold $5.9 billion of assets since 2014. It holds $2.8 billion of cash and securities.

The portfolio went from 42.9 MSF to 6.3 MSF!

Sam Zell believes the outlook for U.S. (and global) real estate isn't very good. There is too much supply entering the market or already in the market. He doesn't see where the demand could come from. The other panelist are a little bit less pessimistic but do little to counter Zell's points. Zell puts his believes into practice and is hoarding liquidity. If you need to be invested in REIT's EQC, ELS and EQR could be safe options.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.