The Federal Reserve’s effort to jolt the U.S. economy to life by pumping cash into the financial system is causing price gains on everything from stocks to apartment buildings to outpace growth, according to billionaire real-estate investor Sam Zell.
“There is a little bit too much Kumbaya,” in markets today, Zell, founder of Equity Residential, the largest publicly traded U.S. apartment landlord, said today at the Talmage Credit Conference in New York. “The enormous liquidity is distorting values.”
The central bank’s policy of keeping interest rates near zero is rounding out a fifth year as policy makers push forward with $85 billion in monthly bond purchases with the unemployment rate stuck above 6.5 percent. Excess capital is shrinking the investment universe, said Zell, nicknamed “the grave dancer” for buying distressed properties that had been left for dead in the 1990s.
“There is a direct correlation between shortage of capital and the quality of the opportunity,” he said.
The majority of Equity Residential’s holdings, apartment complexes in large cities, will benefit further from surging demand for rentals, Zell said. Values of multifamily dwellings outside of major urban areas such as Manhattan are poised for declines, he said. There is likely to be “some weakness” in cities including Dallas and Washington, Zell said.
U.S. apartment prices decreased 0.2 percent in September, the first monthly decline in nearly four years, Moody’s Investors Service said in a report yesterday. A 1.3 percent monthly gain for properties in major markets was offset by a 1.1 percent dip in smaller cities, according to the ratings company. Values for all commercial property types rose 1.8 percent, and have recovered 47.2 percent since bottoming in 2009, according to the Moody’s/RCA Commercial Property Price index.
The best buying opportunities after the property bubble burst in 2007 were had by scooping up discounted securities such as commercial-mortgage bonds, Zell said.
“Because the real-estate industry was basically constipated, the real goodies occurred on the paper side, not on the brick-and-mortar side,” he said.