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SAN FRANCISCO-“Open Kimono, total transparency.” That was the phrase Sam Zell said as the major contributor to the success of the REIT industry and what he said will continue to be the case going forward. Zell, chairman of Equity Group Investments, Equity Lifestyle Properties Inc. and Equity Residential, was highlight at the NAREIT REITWorld 2013 lunch on Thursday.
In speaking with Steven Wechsler, NAREIT's president and CEO, Zell looked back years at a keynote speech he gave at the NAREIT Annual Convention in New Orleans in 1993, where the number of participants was maybe close to 100 or 200—at a time when the REIT era was truly just beginning, Zell said. In preparing for that speech then, Zell said there was one thing that kept coming back into the forefront of his thought process, and it was a bumper sticker he saw in Houston in 1984 that said “Please God, give us one more oil boom. We promise we won't screw it up.”
Zell said that when the government passed the original REIT Act, the purpose was to create an opportunity for the “little old lady of Pasadena” to be able to invest and own a piece of America's commercial real estate. “The whole concept that we were wrestling with in 1993 was how we could fulfill that objective.”
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In 1989, the industry was confronted with a situation it wasn't confronted with before, he continuted. “It was that all of the sources of capital had gone home.”
If you think about our industry then, we screwed the public in every way we could, said Zell. “We created public limited partnerships that screwed the public right and left. The answer is where we were in 1993 was that we had extraordinary chance once again to tap the market of deep capital and the message in 1993 is the same message today… you can do nothing more today than protect your source of capital. It is that capital that is what the modern era REIT is all about.”
What was said in the speech in 1993 still holds true today for the REIT industry to continue its success, said Zell. That is that “there isn't any doubt that the real estate industry is made up of some of the smartest guys around. But we need to do deals that are straight. We need to sell income in place. We need to sell reality.”
Open kimono…total transparency, Zell said to the packed room of NAREIT attendees. “Transparency is a major contributor to the success of our industry and will continue to be the case going forward.”
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By virtue of creating liquid, transparent entities, the amount of capital that has been made for this industry has been staggering, said Zell. We have been able to attract all the players... As far as I am concerned, an integral part of everything is creating a liquid governance, excellent environment that attracts capital and ultimately attracts real estate. “In 1993, I thought any real estate operator of any scale of any size would find the REIT format the most attractive. What we have done is create vehicles that have created access to that capital.”
But the current environment is very difficult for sustainable growth, he warned, due in part to political leadership. “If you believe that the US position as a reserve currency is very important, than you have a leadership responsibility to take steps to protect it and I don't think it is happening, and the risk is huge.”
He added that “Every time the Government interferes and try to deter the rules of economics, it doesn't work.” He pointed out that all of the “pretend and extend” in 2008 and 2009 hasn't really been resolved. “Having no cost to capital means you have no internal discipline. We would be much better investors and operators if there was a consequence for failure to act. There is no sense of urgency and if you don't have a sense of urgency, you don't make as good of a decision as when you do.”
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
