By Konrad Putzier
Leave it to Sam Zell to call foreign investment “bullshit,” the commercial real estate market a “whorehouse,” and still end up with a surprisingly sensible argument.
The famously blunt investor and REIT pioneer used Eisner Amper’s real estate private equity summit last Wednesday to pick on the common notion that foreign investors are driving up commercial real estate prices in New York and other cities.
“I can’t speak for everybody else,” said Zell, “but I think the — quote — flow of foreign capital is a bunch of bullshit.
“I believe the real estate impact of foreign investors in the United States in the past couple of years has been benign,” he told a packed audience at the McGraw-Hill Conference Center in Midtown. “In other words: they haven’t set the prices, they have gone along with them.”
Zell argued that today’s investors are a different breed from the Japanese buyers that scooped up New York’s commercial buildings in the 1980s. Back then, he claimed, foreign investors with little local market knowledge overpaid for office towers, driving up prices.
Today’s foreign buyers, in contrast, are more savvy and generally don’t pay much more than what local investors would spend, according to Zell.
This means foreign buyers have little to no impact on commercial building prices.
Zell’s argument is controversial, given that other industry bigs tend to claim foreign buyers, indifferent to cap rates, are inflating land and trophy commercial property prices in Manhattan.
While he is critical of foreign capital’s impact on New York, he shares the common view that its volume will increase.
“There’s going to be bigger inflow of capital because we’re looking like the best broad in the whorehouse,” Zell said. “But you need to remember that’s a relative description.”
Zell, who has been investing heavily in emerging markets in recent years, said he doesn’t see the kind of growth potential he is looking for in the U.S.
He claimed the U.S. office market is in equilibrium and doesn’t need more supply — with the exception of a few cities.
While employment is picking up, he argued that most office tenants choose to use less space per employee, keeping a lid on demand. “The problem isn’t capital, it’s tenants,” he said.