April 27, 2021

Exclusive: Why Sam Zell Is Bullish on Offices—But Won’t Invest in Them Anymore

And where the Grave Dancer is branching out into other things instead, juggling businesses like logistics, health care, and energy.

Reported by Larry Light

Art by John Cuneo

To say Sam Zell has strong opinions is like saying a grizzly bear enjoys eating. And one of his most passionate viewpoints is that the office market and urban living, which are symbiotic twins, aren’t about to become relics—a fate that many expect in a work-from-home society.

“The world for 500 years has been urbanizing, maybe longer,” the Chicago-based financier declared in a TV appearance recently, arguing that’s because humans are social animals. “It ain’t going to change now.” Cities have survived previous pandemics, including the Black Plague, he added.

He doubts that tales of people fleeing cities constitute any permanent trend, and he believes that the urban allure will remain powerful. “At 5 o’clock in New York, you have 27 different things to do,” he said. “In Nowheresville, you have one—cross the road and visit the pig farm.” So once the pandemic is over, reasoned billionaire Zell, who made his fortune in office properties, “People will fill up offices. Nobody is motivated by a modem.”

But does this mean that Zell, known as a dealmaker and investment strategist extraordinaire, is putting his money into offices again? Hell no.

“The office market has an oversupply,” he said in an interview with CIO. That, he said, was owing to the likes of WeWork, once a hog for more space, and developers eager to feed what they thought was an insatiable demand. A study from real estate services firm CBRE backs him up: The report found that, even after the virus fades, “a considerable amount of available downtown office supply will cause high vacancy to persist through 2021.”

Rather, Zell is focused on energy, logistics, manufacturing, and health care, which he believes hold better opportunities than much of real estate. In fact, just 30% of the assets in his Equity Group Investments holding company are in real estate, and they are mainly in three public real estate investment trusts (REITs). The biggest one is in apartments ($27.9 billion market cap), the second largest is in manufactured home and RV parks ($12.6 billion), and the smallest is in offices (a mere $3.5 billion).

The Grave Dancer

With his no-holds-barred opinions and distinctive appearance (short, bald, trim white beard), Zell is one colorful fellow. At 79, with more than a half-century in business, he still exudes enormous energy and ambition. As he wrote in his book, “The definition of a schmuck is someone who has reached his goals.”

By all accounts, he has a tough negotiating style. In contrast to standard Wall Street politesse, he is brutally blunt. In the book—tellingly titled Am I Being Too Subtle?—Zell admitted: “I can seem gruff. … I can be impatient. I have a sense of urgency. What I can’t figure out is why so many other people don’t have it.” Earlier in his life, he recounted, his career often took precedence over his roles as husband and father. His success in business is undeniable. Forbes estimates his net worth at $5.4 billion.

Zell’s nickname is the Grave Dancer, a sobriquet he revels in. The seemingly ghoulish moniker comes from the title of an article he wrote in the mid-1970s for a New York University periodical, summing up his approach to investing. “I am dancing on the skeletons of other people’s mistakes,” he wrote. Especially in the last three decades of the 20th century, he looked for undervalued and distressed properties, gobbled them up for cheap, and turned them around. One of his favorite proverbs is: “When everyone goes left, look right.”

Take his unconventional approach to special purpose acquisition companies, or SPACs, which are investment platforms that have been all the rage since last year. These so-called blank check companies accept investors’ money in an initial public offering (IPO), and have up to two years to use that capital to acquire a business.

Zell has expressed concern that SPACs in general might be a fad, harming investors with many clunker offerings. A lot of them are pushing into overcrowded and problematical areas, like electric cars. Despite that, he has started a SPAC of his own, but of a different stripe than the usual fare.

For Zell’s own SPAC, Equity Distribution (its IPO was last September), he is targeting something specific, and off the beaten trail: industrial outfits that have some kind of technological edge. Zell, as chairman, controls the SPAC and is by far its largest investor, with a 20% stake. The lone major pension shareholder is Alberta Investment Management, at 4.7%. As the SPAC hasn’t bought anything yet, its shares still hover around its $10 offering price.

A Question of Timing

Making the right move at the right time has been a hallmark for Zell throughout his career. In his book, Zell points to his father as an inspiration, someone who always wanted to be a step ahead. A grain merchant in Poland in the 1930s, Bernard Zielonka (the family name later was changed to Zell) traveled a lot through Eastern Europe and, from what he heard and saw, figured out he needed to get his family out before the Nazis took over.

Other Polish Jews, who remembered their civil relations with German troops during World War I, couldn’t see the danger, Zell told CIO. Bernard transferred money out of the country and then sneaked his family away, ultimately to the US. After they settled in Chicago, Sam was born.

Young Sam Zell began in real estate by managing an apartment building while an undergrad at the University of Michigan. In 1968, he started Equity Group Investments. And then Zell became one of the leading forces in REITs.

His main REIT holding, Equity Office Properties, acquired scads of flagging office buildings in the 1990s, after over-expansion in the category brought many to grief. With that exquisite timing, Zell sold the company to Blackstone in 2007 for $39 billion, just before the financial crisis once more devastated the sector.

His other two big REITs are a mixed bag at the moment. Equity Residential is in what sports teams call a rebuilding year, although Wall Street thinks its recovery prospects are fine. The company has 304 properties and almost 78,000 apartments, concentrated on both coasts in urban areas, where COVID-19 hit hard and early. The multifamily REIT went public in 1993 and its stock has quintupled since then. Like so much else, its market value suffered in the spring 2020 pandemic-driven stock rout, however. “Occupancy and rents slackened,” Zell told CIO.

At a time when REITs still are out of favor due to fears about rising interest rates, Equity Residential’s stock has come back to a degree, yet at just below $75 remains $14 shy of its October 2019 peak. Green Street, the real estate research firm, noted in a report that revenue should fall 6% in 2021, yet resume growth in the following two years. A headwind, Green Street contended, was the apartment company’s focus on urban areas, which the pandemic economy hasn’t been kind to.

On the other hand, Equity LifeStyle Properties has weathered the recent unpleasantness well. With more than 156,000 sites scattered over 33 states and British Columbia, it has benefited from the RV pandemic wanderlust boom, and the stock is almost back to its late-2019 apex. In fact, since the REIT’s 1993 IPO, the shares have risen 17-fold, and the company just increased its dividend.

And office holdings? Well …. Let’s say it’s a good thing this asset class is merely a small part of the Zell empire now. The stock in Equity Commonwealth, which has what’s left of Zell’s office portfolio, is still down by almost half from 2007, right before the financial crisis. Revenue last year fell 50%, and earnings, known as funds from operations in REIT parlance, also slid.

The New Stuff

Nowadays, Zell is looking into nooks and crannies far from the real estate world he has dominated. His holding company owns or has big stakes in a panoply of 22 such companies as Ardent Health Services, a chain of 30 hospitals; RailUSA, which operates short-line freight railroads that link such places as Memphis, Tennessee, and Canton, Mississippi; and Ventana Exploration and Production, holder of wells in Oklahoma’s Anadarko Basin.

Sometimes, Zell pounces on a quick turnaround opportunity. After oil prices collapsed in the middle of the last decade, he bought bankrupt driller Penn Virginia in 2016, and, when crude recovered, he sold it the next year.

Other times he is a long-term investor: In 1986, he purchased a rail and container leasing business called Anixter International and moved it into a whole slew of other activities, ranging from mechanical door hardware to video surveillance. Zell sold it in 2020, after revenue had expanded 14 times since his arrival.

Of course, during his long career, Zell has suffered some defeats. He led an $8.2 billion buyout of the Tribune newspaper company in 2007, which ended up in Chapter 11 the next year during the financial crisis.

How does Zell manage all these various assets? Like his more-genial counterpart, Warren Buffett, whose Berkshire Hathaway also owns a diverse group of companies, Zell delegates. “I’m the chairman of everything and the CEO of nothing,” Zell told CIO.

Looking at the past, Zell said, “I was the biggest buyer of offices in the 1990s.” And now: “There are other things.”