Billionaire Sam Zell Says Recession Likely in Next 12 Months

Sam Zell: Fed Rate Hike is Six-Eight Months Too Late
  • Fed rate hike should have happened six months ago, he says
  • Investor seeking opportunities to buy distressed energy assets

Billionaire investor Sam Zell said the U.S. economy could go into a recession in the next year and that an expected Federal Reserve interest-rate increase is coming at least six months too late.

The central bank has been too cautious and the economy would already be adjusting if it raised rates six to nine months ago, giving Chair Janet Yellen “more room if a recession is on the way,” Zell said Wednesday in an interview on Bloomberg Television. Multinational companies are laying off workers, global trade is slowing and there’s a possibility China’s economy will falter, he said.

“There is a high probability that we are looking at a recession in the next 12 months,” Zell said on the “Bloomberg<GO>” program. “The strong dollar is having a tremendous impact on U.S. production and U.S. businesses.”

The wide-ranging interview touched on junk bonds, how the drop in energy prices is creating buying opportunities and why Zell, chairman of apartment landlord Equity Residential, isn’t a big buyer of commercial real estate at today’s elevated prices.

In October, Equity Residential agreed to sell 72 properties with 23,262 apartments in five states to Barry Sternlicht’s Starwood Capital Group. The company also said it intends to sell an additional 4,728 apartment units next year, including all of its assets in Connecticut.

Multifamily buildings have led the five-year recovery in commercial real estate, with values exceeding the 2007 peak by about 34 percent, according to Moody’s Investors Service and Real Capital Analytics Inc.

With “pricing currently available in the commercial real estate market, it is very hard not to be a seller,” he said. 

Energy Investing

In other areas of investing, Zell said he’s more focused on natural gas than oil and is buying distressed energy assets in areas such as Colorado and the oil-rich Permian Basin beneath Texas and New Mexico. There’s “too much pessimism about the price of energy,” he said.

“It’s a little bit like buying real estate -- we made a fortune because we bought real estate at replacement cost,” Zell said. “We are buying gas in the ground, gas that has already been drilled. We are buying wells at dramatically less than that.”

The drop in oil prices is contributing to a junk-bond selloff and may be creating some buying opportunities, Zell said.

“Energy pricing has gone down, therefore the margins have gone down,” he said. “There are all kinds of junk bonds being renegotiated. There is little doubt that the junk-bond market is going to suffer.”

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