Cities: The Least Bad Part of US Real Estate

As a general rule, if you get the opportunity to hear Sam Zell speak, you should take it. He was on the real estate panel today, and he didn't disappoint.

The moderator was Lew Feldman, a real-estate lawyer, who started by talking about the "debt and equity markets" in real estate capital, except his accent managed to make it sound like "dead-end equity markets". Thus was the tone set.

Zell started off by blaming the government, at least in part, for the current housing crunch. Every time over the past 40 years that the government decided that they wanted to increase homeownership over 62%, he said, there's been a disaster. This time round seems to be no exception: homeownership went from 62% to 69%, and those new home buyers turned out to be much less creditworthy than most, and also turned out to be the suckers who bought at the top.

Even so, said Zell,

I think it's all overstated. I'd buy all the subprime debt I could find at 40 cents on the dollar, in terms of recovery, and there are subprime CDOs out there which are trading for a nickel.

Zell also pointed out that if a bank tells an underwater borrower to sell his house, the borrower has no incentive to show or sell that house. But when the bank forecloses, it has every incentive to sell. So as foreclosures rise, we might well see even more of an increase in home sales. But that would not necessarily be good news.

Zell then got into an intersting conversation with Bobby Turner, of Canyon Capital Advisors, about demographics and urbanization. Turner, channeling the likes of Ryan Avent and Richard Florida, said that consumer prefences are going to move away from the suburban lifestyle as transportation costs soar.

Zell agreed, pointing to enormous growth of housing in what he called "24/7 cities", putting a lot of that growth down to the societal deferral of marriage.

But as cities become ever more expensive and the suburbs become ever cheaper, he was asked, won't corporations move out to the suburbs? No. Motorola rented 200,000 square feet of office space in downtown Chicago last year, he said, even as they have over half a million vacant square feet not far away in McHenry county. If the employees are moving to the cities, then the companies are going to have to follow suit.

Generally, the panelists were downbeat on all US assets, with Zell reserving most of his zeal for Brazil. But if there is a growth market in the US, it's the big gateway cities: both hotels, which can benefit enormously from the weak dollar, and lower-end rental properties, which will benefit over the long term from immigration and population growth.