September 12, 2013
CHICAGO— Sam Zell gained the nickname "the grave dancer" in the early 1990s for buying beaten-down real-estate properties and riding them to huge recoveries.
During the recent downturn, he rarely has made it to the funeral.
Mr. Zell has done relatively little buying since the market crashed five years ago, viewing prices as remaining too high, even as rivals such as Blackstone Group BX +0.31%and Carlyle Group CG -0.12%made big acquisitions. Now that U.S. housing and property markets are rebounding, Mr. Zell is missing out on returns that some investors have enjoyed.
The man known as 'grave dancer' has turned cautious on real estate. 'I'm not singing "Kumbaya" like other people.'
.Mr. Zell says he has a low of just 30% of his personal investment portfolio in real-estate investments, down from 40% about seven years ago. In 1990, half his money was tied to real estate.
"We're dealing with a world that's dramatically more volatile, and that requires more caution and care than before," Mr. Zell said, his voice rising, during an interview at his Art Deco office building next to the Chicago River. "I'm not singing 'Kumbaya' like other people."
It isn't like Mr. Zell to spoil the party. The 71-year-old real estate mogul has been one of the biggest, most aggressive commercial-real-estate investors for decades, accumulating a net worth of $4 billion, according to Forbes magazine. In 2007, for example, he practically defined the top of the market with his deal to sell Equity Office Properties Trust to Blackstone Group for a record $39 billion—a deal that netted him personally around $1 billion, said people close to him.
Peers who share some of Mr. Zell's concerns about the market say he has paid a price for staying out. "He definitely missed the first leg of the rally," said Rick Singer, a founder of New York-based property investor Eastbridge Group.
Mr. Zell says it is too early to judge his call to stay on the sidelines, arguing that some deals cut at the market's lows won't look as savvy when the Federal Reserve eventually slows its involvement in markets.
At the beginning of the year, he sent close friends and associates a music box featuring Fed Chairman Ben Bernanke wearing a pinwheel hat in the shape of the U.S. Capitol building. Pressing a button starts a song warning that the government's so-called quantitative-easing program will come back to haunt the country.
Mr. Zell's wariness is one side of a heated debate in the market, with some investors convinced values will keep rising and others arguing that economic growth in the U.S. and elsewhere has been artificially enhanced by loose central-bank policies and will slow when the easy money ends.
Commercial-property values have rebounded strongly and hit record territory this year. An index compiled by Green Street Advisors that fell 61.7 in May 2009 from 100 in August 2007 climbed back to 104.3 last month. But in recent months, prices have stalled because of rising interest rates, Green Street says.
Mr. Zell hasn't lost the intensity or candor that helped make him a legend in commercial real estate. He acknowledged that others did well buying properties in 2009 and 2010. "I wish I was perfect," he said, pacing the room during the interview. "I would have made a fortune when the market went down."
He said he has shifted to other types of investments, such as bets on natural gas, international real-estate deals in emerging-market countries including Colombia and India, and a distressed-debt fund. Many of these could be winners.
"You shouldn't misinterpret caution with inaction," he said.
Outside of real estate, Mr. Zell hasn't always had success. In 2007, for example, Mr. Zell bought Tribune Co. for $8.2 billion. The media company filed for bankruptcy protection a year later, costing Mr. Zell more than $300 million from his own pocket.
Mr. Zell isn't the only real-estate pro who held back when the market was down. Steven Roth, chairman of Vornado Realty Trust, VNO +1.03%expressed frustration in a letter to investors last year. "I find investing in this market difficult," he wrote.
Sam Zell's Art Deco office building along the Chicago River.
.Yet, few property investors have been as skeptical of the current rally as Mr. Zell. At industry gatherings, on financial TV and in conversations on his private jet, Mr. Zell has repeated his aversion to big property deals.
Mr. Zell's breakthrough came when he and Merrill Lynch raised a fund to buy distressed assets just ahead of the early-1990s recession. That downturn differed from the latest partly because banks, thrifts and regulators capitulated quickly on pricing troubled assets, allowing investors like Mr. Zell to snap up enormous portfolios of loans and property at super-discounted prices. This time, lenders have been more inclined to hold distressed assets because interest rates are low.
Many commercial real-estate deals done at the market's bottom now look prescient. For example, a venture of George Comfort & Sons and RCG Longview Equity Fund LP paid about $600 million in 2009 for Worldwide Plaza, an office tower in Midtown Manhattan. The venture recently agreed to sell a 49% stake to RXR Realty in a deal that valued the full tower at more than $1.2 billion.
Mr. Zell still controls a handful of U.S. real-estate companies, but some of those were relatively slow to get back into buying property. For example, his apartment-building owner Equity Residential didn't crank up its buying machine until 2010 and did its biggest post-crash deal in February, buying Archstone with a partner from the estate of Lehman Brothers.
Mr. Zell remains wary of most real estate. During a real-estate conference hosted by New York University this spring, a student approached Mr. Zell to ask about getting into the business. The student received some unexpected advice.
"Go to medical school," Mr. Zell suggested.
Write to Craig Karmin at firstname.lastname@example.org and Gregory Zuckerman at email@example.com