CHICAGO- Billionaire real estate tycoon Sam Zell sees a realestate industry dominated by a few large players in the future, achange that will be bring huge consolidation activity to theindustry in coming years. In a Q&A held here, Zell spoke onthis and other topics, ranging from over-investment in technologyby industry to how real estate companies will become more focusedon becoming operating companies instead of just dealmakers.

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“The oligopolization of our business will lead to it becomingdramatically less cyclical,” said Zell. “And in the future, the bigguys are going to be 20% more profitable than the smallplayers.”

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Equity Residential REIT will likely be moving into offeringservices to its huge client base of renters, says Zell. “EquityResidential interfaces with one million customers a year, 80,000 ofwhich leave to buy a home. We are going to be offering thesecustomers mortgages, insurance and other services.”

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Zell expressed amazement at the fundamental changes he hiswitnessing in how real estate company's are being run. “We are nowstarting to concentrate on things like margins andreturn-on-investment,” he said. “In the past, the only thing wecared about was how to get financing for the next deal. The marketisn't rewarding companies for one-off gains, but instead rewardsthose that can create a dollar of cash flow in perpetuity.”

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Zell's comments were echoed by Equity Office REIT's top brass atan analyst's conference held in Boston last Wednesday. EquityOffice president Tim Callahan and other top officials stressed anumber of specific initiatives to build organizational value atEquity Office, in which Zell is the largest shareholder.

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Analysts came away impressed that Equity Office wants to moveaway from being just a collection of assets toward buildingdynamism as an organization. That didn't help Equity Office's stockprice though, which barely budged after the company's high-poweredBoston PR effort and continues to trade at an FFO discount to otherlarge capitalization REITS. This discount exists despite EquityOffice's efforts at boosting margins, which Zell says have jumpedsharply since Equity Office went public three years ago.

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Zell sees few problems ahead for the real estate business, whichhe says has not indulged in the massive overbuilding that hascharacterized the business in the past. He attributed this togreater discipline on the part of lenders, who are vastly moreskeptical of real estate than in the past. He says, however, thatthe same over-investment that used to occur in real estate iscurrently going on with technology, which he believes will havedramatically negative consequences for the economy in comingyears.

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