The pair contrasted the current investment market with times past, as Linneman noted that 10 to 15 years ago, "$200 million was a big fund" when there were no large REITs and no global dollars, but that now a $400-million-plus fund was considered a "niche" fund, among global investment capital and huge REITs. Zell was skeptical about the future of this competition, feeling that the 70s and 90s were the norm in terms of investment and that the current volume of capital was more of an anomaly than an ongoing trend.

"One of the great overstatements in history is that real estate is inflation protection," Zell commented. "It was, is and always will be supply and demand." The opportunity investor felt that the market was simply in a "demand recession." An opportunity for growth, Linneman pointed out, would be the current "unformed households;" young adults and college graduates that were forced to move back with their parents because of the economy and lack of jobs. The UPenn professor said that as that economy turned around, there would be an "explosion" from that group seeking housing. Zell slightly disagreed about the impact it would have, saying that the boom would be slowed by lack of housing.

"But multifamily will absorb some of that," Linneman countered. Zell doubted Linneman's veracity, responding in kind with an expletive summing up his position, further elaborating that roughly 60,000 units were added this year, which hardly covered the surging population. "Multifamily can get truly long-term financing," Linneman pointed out. However, as Zell noted, there was not enough on the market for opportunity.

"I'm the grave-dancer and people ask me where are the opportunities," Zell explained. "You don't have opportunity without volume." The lack of activity and the mixed signals from the political arena left the market too complicated for Zell's investment instincts, which has led him to investing instead in emerging markets.

"[Investors] trade growth for the rule of law" in some foreign markets, he remarked, explaining that it would be a dubious effort to expect a favorable ruling in, for example, a Brazilian court. This reinforced his main point of finding a trustworthy partner in these foreign endeavors, since it was improbable to represent yourself.

Group was not investing in the other three BRIC markets, Linneman quickly pointed out, but it wasn't necessarily Brazil's land that was special to Zell. "[Equity Group] hasn't found anyone we felt was an honest partner" in India, for example, which was a hindrance to opportunity. Zell did not mention which companies he had or had not dealt with in India.

But as foreign investment went, although Zell was a proponent of currently avoiding US investment, he was not fixated on western Europe. "You're trading no growth for no rule of law," he commented. "I don't see any future for it except Disneyland." For an investor like Zell, who searches for growth margins over all else, the spreads in Europe simply did not appeal to him and even less so for Japan, as he jokingly explained, "although comparing growth in western Europe to Japan is like comparing leprosy to cancer."

The last couple years have been hard on the US and opportunities seemed to have lessened, the duo noted, saying that the change in mentality over investment had become detrimental. Linneman recounted that 10% return used to be good, with the rare 25% rate of return the anomaly. Zell agreed, saying that there wasn't opportunity in the US for these size returns unless you leverage out the deal or "play the yield curve" or "floating rate debt." Linneman hammered home the current state of the economy, pointing out a recently ill-conceived notion of return on investment.

"Everyone believed they could do 20s, like it was their God-given right," he said. "And that didn't turn out too well."

Instant Insights /

Zell: 'No Opportuity Without Volume'

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