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

“The oligopolization of our business will lead to it becoming dramatically less cyclical,” said Zell. “And in the future, the big guys are going to be 20% more profitable than the small players.”

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

Zell expressed amazement at the fundamental changes he his witnessing in how real estate company’s are being run. “We are now starting to concentrate on things like margins and return-on-investment,” he said. “In the past, the only thing we cared about was how to get financing for the next deal. The market isn’t rewarding companies for one-off gains, but instead rewards those that can create a dollar of cash flow in perpetuity.”

Zell’s comments were echoed by Equity Office REIT’s top brass at an analyst’s conference held in Boston last Wednesday. Equity Office president Tim Callahan and other top officials stressed a number of specific initiatives to build organizational value at Equity Office, in which Zell is the largest shareholder.

Analysts came away impressed that Equity Office wants to move away from being just a collection of assets toward building dynamism as an organization. That didn’t help Equity Office’s stock price though, which barely budged after the company’s high-powered Boston PR effort and continues to trade at an FFO discount to other large capitalization REITS. This discount exists despite Equity Office’s efforts at boosting margins, which Zell says have jumped sharply since Equity Office went public three years ago.

Zell sees few problems ahead for the real estate business, which he says has not indulged in the massive overbuilding that has characterized the business in the past. He attributed this to greater discipline on the part of lenders, who are vastly more skeptical of real estate than in the past. He says, however, that the same over-investment that used to occur in real estate is currently going on with technology, which he believes will have dramatically negative consequences for the economy in coming years.

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