40 years ago, Sam Zell wrote a scathing article about how HP 12C jockeys ruined the real estate industry. Let's look at how Zell's claims have weathered the test of time...
SZ: "The current oversupply of real estate is different from past cyclical excesses.”
Yup. Default rates for loans that were originated the year Zell wrote this article would exceed 30%, largely due to too much supply
SZ: “Twenty years ago the real estate investor was taught that the three most important lessons of real estate were 'location, location, location'. Today this axiom is replaced by IRR... The current love affair with projections has substituted modern analytical techniques for the basic understanding of the business.”
Still true?
SZ: "The proliferation of real estate syndicators, REITS, pension funds and financial institutions, viewing real estate as growth stock, unrealistically raised performance expectations.”
Eh... REITs have outperformed the S&P and core real estate has delivered relatively consistent high single-digit returns since Zell wrote this article.
SZ: “Demographics is another statistical benchmark currently influencing real estate investments. ...they do not provide leading indicators for the potential success of a given investment. In many instances, just the reverse occurs.”
Senior housing’s underperformance over the last 20 years provides a good example of directional bets gone awry. But nearly every research firm calling for sunbelt busts over the last 20 years due to supply offers a good example of how ignoring demographics can lead to big disconnects.
SZ: "The syndication boom has turned real estate into a business focused on raising money rather than making sound investments."
If only all the “passive income” crowd would have read this article a few years ago.
SZ: “The real estate world has altered the definition of success from cash flow of occupied real estate to groundbreaking ceremonies.”
Ouch
SZ: “The recovery of the market will be slow and painful. The monetization of the currency that previously bailed out real estate excesses will not appear this time. Oversupply and deflation will make internal rates of return, projected rental increases and numerical justification of investment irrelevant in the future.”
Zell was right about it being ‘slow and painful’—the market didn’t recover for 10-15 years—and this may be applicable to the current office market. But IRRs and projections survived.
SZ: “Success or failure will accrue to those who have focused their efforts on the basics that make the business work. The HP jockeys of the scientific real estate community will be replaced by the traditional real estate professional who has learned his trade in operation and not in projection of real estate.”
Missed this one. Success accrued to those who ran in after the trough and picked up heavily discounted properties from the RTC. ...and the jockeys took over the real estate world.
Read the full story here.
COMMENTS