Iconoclastic, brash, hugely successful--Chicago financier Samuel Zell is all that and more. Originally, he was dubbed "the grave dancer" for his purchases of undervalued corporate assets such as radio stations and drugstores. Now Zell is among a handful of innovators who have been assembling huge packages of commercial real estate properties into real estate investment trusts. His office, apartment, and prebuilt-home REITs are the industry's biggest. He is considering a private international fund to be converted into a REIT. Just before Zell took off with a dozen friends--the "Zell's Angels"--for his annual motorcycle tour, he talked with BUSINESS WEEK's Chicago Bureau Chief Richard A. Melcher.
Q: Real estate has always been plagued by violent cycles. What's different this time?
A: I think there's a revolution. The public market has become the ultimate source of capital for real estate and the benchmark for the industry. What I'm talking about is a worldwide movement toward liquidity in real estate. You're moving from direct investment--you buy a building--to indirect, like buying stock on the New York Stock Exchange. That creates discipline in an industry that historically had little or none. And there's another factor: You have all kinds of information that was never available before. You can find out how much it costs to rent an apartment in any market in the U.S. Information dramatically reduces volatility.
Q: Some analysts say real estate is overpriced.
A: Everybody is talking about it being the end of the world. We're dealing with paranoia from [earlier periods of] massive oversupply--that the real estate investment world to some extent is like a game of musical chairs.
Q: The market cap of REITs has gone from about $5 billion in 1992 to about $160 billion to $170 billion. Will that continue?
A: I think that when this year is up total returns are going to be anywhere from 12% to 20%. For the foreseeable future, over the next 10 years, it's probably going to compound at a 30% to 40% rate, both on the equity side and debt side. And we've only converted about 10% of the commercial real estate portfolio. There's still 90% of the world to equitize.
Q: Real estate has always been a local business. Now, the REIT industry is building national groups. Are there economies of scale?
A: We've gone from a collection of assets to an integrated network. That's where you really produce optimum results. What do I mean? Obviously, national purchasing, insurance. In Seattle, when we had 3,000 units, it used to cost us $150 each to have them painted. Now we have 12,000, and it costs $100.
Q: What international markets are interesting?
A: I can start with Western Europe, where there still are significant privatizations and unbundling from state-owned banks. In Eastern Europe and the former Soviet Union, the perceived risk is greater than the reality. We think Asia is very interesting, especially Japan. If they ever get their act together and stop trying to overregulate everything, it could be very attractive.
I'm most bullish on Latin America. It is going to outperform the rest of the world in the next 10 years. Chile, Brazil, and Argentina are all creating private pension funds providing capital for real estate. Capital is flowing, and I believe it is logical to create a worldwide real estate company that effectively arbitrages risks, returns, and asset classes all over the world.
Q: You're chairman of nine public companies. How do you balance it all?
A: First, every company I'm involved with has a CEO who has day-to-day full responsibility for his company on an ongoing basis. And my contribution is: 1) to be a sounding board; 2) to be a strategic and directional thinker; 3) where appropriate, open doors, create access, and participate where my particular talents or experiences are relevant. We're great believers in zero-based thinking--you start each day, and if you don't sell it, then you've bought it.
Q: You've often said you like to test your limits. Where do you go from here?
A: It's all about painting on an empty canvas. I have an opportunity to materially influence the reshaping of a gargantuan industry--an industry that represents 12% of the GNP in this country. I wrote [retiring American Airlines Inc. Chairman] Bob Crandall, who's an old friend, and said: "You know what an extraordinary opportunity you had? You had an industry with a blank canvas, and you painted it." That's the opportunity I have in real estate.