Sam Zell Reflects On His Decades-Long Career

Ask anyone in the CRE industry about Sam Zell and you’re likely to hear the word “icon” uttered at least once. The founder chairman of Equity Group Investments was one of the earliest adopters of institutional capital in commercial real estate and boasts a lengthy track record of turning around distressed companies and assets, taking companies public, and leading industry consolidations. Now nearly 80 years old, the indefatigable Zell shows no signs of slowing; in addition to his work with Equity Group Investments, he is also chair of five companies listed on the New York Stock Exchange.

In a recent wide-ranging discussion with CBRE’s Spencer Levy, Zell spoke freely on everything from the future of the office sector to Zoom culture to his own beginnings as a child born to Polish immigrants 90 days after they set foot on US soil.  The excerpts below are some of Zell’s best observations. 

On the future of office and WFH:

I think when all is said and done, we are a social group of people. We have figured out how to make one plus one equals three by putting people together. As someone who employs thousands of people I haven’t figured out how to motivate by modem…

My view is that business success comes from interaction, from sharing of ideas, from competition. What I’m saying in a broader sense is that companies have personalities. Companies have communities. Those personalities in those communities make a very, very significant contribution to the success of those companies. And I don’t think that can be replicated by a decentralized version where people aren’t interfacing with each other. And therefore, I believe that, as Mark Twain said, that the reports of my death are greatly exaggerated. So to that, I say that reports of the death of office space are greatly exaggerated.

On Zoom:

I think that Zoom is a terrific idea. But Zoom doesn’t create the kind of connection that’s sitting across the table from somebody has… [it] doesn’t encourage the kind of cross-collateralization of discussion that normally would be part of a board meeting and becomes more of a presentation of facts rather than a strategy session with the goal of trying to find the right answer. 

On competition and COVID: 

I think that competition has always been part of our business and there are always parts of it that are doing better than others. I mean, exactly a year ago, I was chairman of the Board of Equity Residential, and we have never seen anything like what happened from March through probably June of last year in San Francisco and New York, rents drop twenty five percent, occupancy dropped. And it was a very, very scary thing as the stock market reflected that same thing where we kind of froze over COVID and everybody moved into their parents’ basement, as the case may be. Interestingly enough, starting in December, we had the biggest month we’ve ever had in December, normally a very quiet month in the multi-family business. And since that time, we’ve basically recovered all of the occupancy we lost and rates have probably recovered 70 percent or more of the drop that occurred a year ago. 

On retail: 

You have to believe that you’re still dealing with a falling knife. I mean, I don’t think we know where the bottom is. I mean, do we think that retail is over? Hardly. Did we start out with a lot of retail five times more per person than any country in the world? Yes. So maybe this dramatic drop is just the beginning of a realignment of the amount of retail and the population.

On a dearth of sublease space and oversupply in office:

I think the real issue with the office market was that it was significantly in oversupply before COVID. In other words, it was facing a significant oversupply, primarily because WeWork and other space sharing companies that thought that they had figured out a new solution. And the result was that an enormous amount of space was leased in anticipation of subleasing it. That never happened. And that didn’t stop the impact on the statistics in the communities suggesting that office space was becoming scarce. And so we ended up in here in Chicago with five new million plus square foot buildings that are going to empty out LaSalle Street and other areas. Same thing is happening in New York and San Francisco. And it’s going to take quite a while, I think, for that new space or the orphans that that new space created get readjusted and re-rented. 

On realignment and new migration patterns:

I really don’t believe that there is any spreading scenario of people working in really remote [areas]. Now, obviously, there are some professions for which that really is suitable in those professions, tend to be scenarios where one person does most of the work alone. So maybe if you’re a coder, you can be in a remote location. But everything else is interconnected with people, interconnected with themes, interconnected with leadership provided by businesses.

On New York City’s inevitable comeback:

Well, I’m only almost 80 years old, and so I only have the benefit of maybe five or six times dealing with the prediction that New York was done for. And I never believed any of those, and I don’t believe it now, as I’ve suggested, you can work from home and move to Iowa. But it gets to be five o’clock in Iowa, the same way it gets to be five o’clock in New York. The difference is in New York, you’ve got a lot of things to do. And in Iowa, you get to watch the corn grow. 

On modern REITs:

The modern REIT era basically defined the concept of liquid real estate. It also, though, defined the concept of running real estate like it’s a company. That’s quite a hell of a difference from the historical developer who secured a piece of land, found the tenant and developed the building. And the day after he delivered the building, his involvement was gone. So I think that the creation and the growth of the modern REIT era has created a bunch of real estate executives who are really executives of a business as opposed to one off developers.

On his entrance into institutionalized, operational CRE:

In the early 80s [we] decid[ed] that, you know, capital was our beverage—our leverage was our beverage, to put it more bluntly—and that we needed to acquire a syndicator because syndication of real estate was becoming a big thing in the early 80s. And we finally made a deal with this one company and we began to do the due diligence. And the guy in my shop who was doing diligence calls me one day and said, “Sam, I’ve seen something that I think is really extraordinary. It’s a mobile home park.” I said “A mobile home park? That’s Marlon Brando yelling, Stella, you know, that’s the tumbleweed blowing and now rolling on the windy, barren site.” He says, you don’t understand what’s happened. They’ve taken the mobile home park business and created these parks and the parks, just like single family subdivisions. They’re beautifully maintained. And you are the owner of the land. And it’s the most secure piece of real estate you could imagine. We ended up buying the company and that was 1984. And as far as I know, I don’t think anybody else in the commercial real estate business knew anything about mobile homes. And when we started buying more mobile homes, there was always kind of the same story. There was a lawyer who was invited to help, owned this mobile home park and he had never owned anything that had, you know, consistent, predictable earnings. You didn’t tell anybody about it then. And he ended up with this whole cadre of owners across the country that were not part of the conventional real estate business. Then we took the company public in 1993 and it included, you know, the total enterprise value was about two hundred and roughly 50 million dollars. Two hundred twenty five million dollars. It’s 2021 and we’ve got a company today that’s got an enterprise value I think of twelve and a half or 13 billion dollars, and it’s been the number one growing REIT since the beginning of the modern REIT era. It’s a very different perspective on, quote unquote, being in the real estate business than the guy with calluses on his hands, you know, holding up the studs and putting the deal together.

On emerging markets:

We got involved in emerging markets in 1997. Our motivation was that we saw [what] the creation of the modern REIT era had done to create liquidity and we were convinced that there was an opportunity to do so in emerging markets as well as in established markets like Japan. In many cases, it really turned out to be a political problem, which up front I didn’t understand, but like anything else REITs sounded terrific until it was your ox that was being gored. The Japanese REITs today are successful. They’re nowhere near as successful as they could have been, but they are really controlled by the big, major real estate companies. And they promoted and adopted a management operation where these companies are externally managed and the external managers are owned by the major real estate companies. And that’s a conflict of interest that has a real impact on slowing down the growth and the innovation of an industry…But, you know, there’s nothing to replace an open system like what we have in the United States. And that’s why we’ve taken a market that in 1991 was seven billion and today is over a trillion dollars. That’s called growth of an asset class.

On COVID:

I’d like to think that this is a one shot scenario and that we have, quote unquote, responded to COVID the same way we responded to World War Two and in effect, said during this period of stress, we’re not going to be disciplined by, you know, you don’t spend, which you don’t earn. I hope I’m right. Maybe it’s hard to make a case that I’m right based on what’s going on in Congress today. 

On US debt and fiscal conservatism:

I don’t think you can take the United States and, you know, 10 years ago we were ahead and whatever it is, 50 percent of our GDP in debt and now we’re at one hundred and two and a 10 year period of time. All of those borrowings have to be repaid. And you think about the risk free rate of return, the risk free rate of return for 30 years was five point six percent. If five point six percent were applied to our current debt levels, our country would be broke. So we’ve got to, in effect, continue interest rates at low levels in order to be able to service our debt, make some dint in repaying doing that and keep inflation, you know, restrained. It’s very difficult if you’re sending stimulus checks to people who don’t need it.

On inflation:

I’m worried about, you know, a government that seems to be irresponsible on costs and insensitive to what this kind of a debt structure means. And ultimately, what we’re really talking about is the role and the value of the US dollar. We have an extraordinary crutch in America because our currency is the reserve currency. Things would be a lot more expensive if the reserve currency were something else other than the US dollar. Yet we’re polluting its value and at some point, if we don’t get better at it, the US dollar will no longer be the reserve currency, and the impact on the United States will be quite serious.

On fiscal growth:

Redistribution of wealth is a governor on growth. And that’s where we’ve had so many years of subpar growth. I think that we’ve got to be very careful that we don’t let the government superimpose political views on when I call the basics of our economy. I mean, we have a unique system. It’s the most attractive economic system in the world. Everybody wants to be in the United States because of what you can do here and the freedoms that it represents. And I think that overemphasizing the role of government is not a productive solution.

On ESG:

There’s very little in ESG that I can complain about. And I have no trouble being a supporter of those goals. I think the question on the table is at what price and to what extent am I a supporter of companies that pollute the environment? No. A supporter of groups that are on the far extremes of any of these issues? No. And it’s that balance that we need. I mean, we need to protect our environment. We need to protect and not foul our nest. But we need to also make sure that we don’t allow current fads or goals or artificial limitations to pollute the system that we’ve created. That’s the envy of the world.

On risk:

There’s more political risk today to being an owner of real estate then certainly it has been in the last 50 years, whether it was the legislation passed by the state of New York that changed a lot of the rules to, you know, various rent control provisions. Those are very threatening and generally increase risk, despite the fact that there’s never been a successful scenario of rent control in the history of the world. And every time there’s a new Santa Monica or a new place to use it, it sounds terrific, but it disincentives the real estate community and therefore depreciates one of the great assets of any given society. 

On data and AI: 

There’s no question that data is critical to being a real estate investor. In the early days before the Internet, a typical bank manager who made a bad real estate loan when the loan went bad, he would tell his board, ‘how was I supposed to know that they were building all these new buildings?’ That excuse doesn’t fly anymore because there’s no excuse today…

As far as algorithms are concerned, I’m not disputing artificial intelligence, but I must tell you that the tenants are people. And I’d much rather rely on people to make the decisions as to what is attractive and what isn’t versus some artificial algorithm. Maybe the artificial algorithm becomes the confirmation point. I don’t know, but I’m not in any way, shape or form prepared to delegate the concept or the responsibility for judging risk and judging futures to some kind of algorithmic response.

On his upbringing: 

I was born 90 days after my parents came to this country. I therefore grew up in a real immigrant household. And since my parents were escapees, for lack of a better word, left Poland in 1939, their perspective and their focus in the United States is really different. They thought the streets were paved with gold because they were free, because there weren’t any groups or government that singled them out or in any way, shape or form diminished their opportunities. I grew up with them, you know, pounding at the dinner table. What it meant was that there was a direct relationship between how well you did and how hard you worked…just the encouragement of making oneself better was a very iterative part of that whole growing up process. 

On how being himself has defined his success in CRE:

The single most relevant word is freedom. More than anything else, my ambition was driven by my desire for freedom. Freedom meant that I didn’t have to wear a suit and freedom meant that I could ride a motorcycle. Freedom meant that I could do things that other people couldn’t do or wouldn’t do. To me, that’s been a critical part of my life. I think I’ve been very successful because one of the freedoms that I have achieved is freedom of conventional wisdom. I started with nothing. And so my achievement had to include capital gains, not just income. So I was constantly trying to figure out how to achieve or accumulate capital that made me different and made me recognize that if you followed conventional wisdom, margins would also be conventional, that only in unconventional directions, like being a great dancer, can you, in effect, achieve capital gains that ultimately lead to a base for economics.

On being dubbed a ‘grave dancer’:

I think that I have historically been able to look at things usually from a longer perspective than the average. In 1971, commercial real estate was, you know, 95 percent occupied across the country. And my specialty at the time was multifamily housing. I was responsible for putting up financing to build a lot of multifamily housing. And then all of a sudden I recognized that we were heading into excess and so I stopped. And yet my confidence in this goes back to being an immigrant kid. My confidence in the future of our country was really very, very strong. But it was clear to me that we were going to go through a period of dislocation. And to me, that dislocation turned into an opportunity. Being a grave dancer suggests that, you know, one prances around areas of distress, but no one recognizes that one can fall into it. 

On his advice for those looking to be the next Sam Zell:

Number one, you got to be tireless, you got to have a lot of energy. I think you’ve got to be a keen observer. All my life, I’ve been an incredible reader and I still read an enormous amount every day…I spent my whole life, you know, looking for and recognizing changes in trends and changing directions that create opportunity. There is no substitute for being aware. There is no substitute for being curious. There is no substitute for being self-confident. Those are the real things that matter. And, you know, the word failure doesn’t even exist in my lexicon, maybe it didn’t work out, but there were no failures. And so there have been many times where I’ve been hit down and I get up off my ass and start over again and keep climbing the mountain. And I like to accuse Confucius of saying that the definition of a schmuck is someone who has reached his goals. I’ve never reached my goals and I’ve constantly moved the bar forward so that I get up every morning and there is a new hill to climb, a new thing to challenge. And that’s what turns me on.