September 12, 2006

BY TED PINCUS

The world's currently holding its breath over a potential real estate bust. But not Sam Zell. He's exhaling. And he says, "Relax. The things are still on track." Amazingly physically fit at 63 and still zooming around town on his Ducati motorcycle, the bearded elf with twinkling eyes hasn't changed much at all since I first met him 20 years ago. Still ensconced in his verdant, terraced office overlooking the Chicago River at Madison, he's only changed in terms of financial fitness. The latest estimate of his personal net worth is something over $2.5 billion, "and I can't wait to see what Forbes says it is now when they issue their annual update this fall," he says with a note of sarcasm.

Zell is as much the positive thinker as ever. He's almost fully invested in equities these days -- testimony to his steadfast belief that the U.S. economy can weather the myriad storm clouds that so many fiscal weathermen are forecasting. "The enormous monetization of hard assets has vastly increased liquidity worldwide," he says, "and liquidity equals value. It has reduced the cost of capital. This has been an engine, and world growth will continue to benefit."

No recession in sight

Zell rules out a recession, at least until a new administration takes over in 2009. As long as unemployment stays below 5 percent, and the gross domestic product remains robust, and inflation stays tame, he believes "the wild cards" pose a low threat level.

Sagging consumer spending? It'll be offset by revitalized capital spending. The ballooning federal deficit? It's a mortgage on the economy, he says, but we're fully capable of servicing the debt, and we're still not over-leveraged. The Medicare crisis? Unfunded pension liabilities? Record consumer credit? Rising mortgage rates? He scoffs at each of these specters, confident that the current economy has staying power.

He points to federal tax revenues that are now actually exceeding projections. He reiterates his firm conviction that interest rates are mainly a function of supply and demand unless the Fed tampers too much, and he currently estimates that the next Open Market Committee rate action could actually be downward, not upward.

If there's one aspect of the economy that Zell knows best, it's real estate. He's the nation's biggest landlord. His Equity Office Properties owns 110 million square feet of prime office space in most major cities. His Equity Residential is the largest apartment real estate investment trust in the U.S., with 200,000 apartments. And his Equity Lifestyles Properties is a REIT operating 285 residential communities with more than 100,000 sites, mainly in the Sun Belt.

Bubble? Should he worry? In true Alfred E. Newman fashion, Zell decries the Chicken Little alarmists. In fact, to paraphrase Will Rogers, he's never met a bubble he didn't like.

There might be a current oversupply of existing homes, he says, but it's a temporary phenomenon, and a healthy economy will generate the demand to work it off.

"Prices may be soft, but they won't change dramatically," he says. "In fact, since the Great Depression there's never been a genuine bubble burst other than the 1993-95 California home price collapse, artificially created by the historic slump in defense industry spending. My mantra is "replacement cost," and as long as we continue to see a significant spread between that and home prices, we'll see relative stability."

Zell feels strongly that the widely feared real estate bubble is truly a creation of the American media. "They've painted a crisis about ARMS [adjustable-rate mortgages] that may be re-set at higher rates and cause widespread panic. But I believe this will be far less severe than predicted. Whether it's a real estate bubble or the Ramsey killer or the Duke U. lacrosse team gang rape [allegation], when the media smell excitement and decide to blow up a story, they all fall in line."

Holding the line on dividends

REIT stocks suffered in 2001 when real estate -- and the economy -- softened. But the moment of their true maturity came, Zell says, when the dividends of most REITs remained solid despite the slump. Since then, while the S&P total return has been 24 percent, REITs have returned 111 percent.

As proof that he's not blindly in love with his own Monopoly board game, Zell admits that only 30 percent of his personal assets are now in real estate. The balance are in equities such as American Commercial Lines, the company he built into the nation's largest barge service; and Anixter International, the Chicago wire and cable distributor acquired by Zell's Itel when its volume was $600 million. Today, sales are $4.2 billion, and it's wiring the world for broadband.

"It's equally exciting to be growing these things," he says with his characteristic impish grin, "and I'll only stop when it isn't fun anymore."

Ted Pincus is a finance professor at DePaul and an independent communications consultant and journalist.

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