SamZell renewed his predictions of a recession — albeit a mild one — in April 13remarks at New York University's annual REIT symposium, and companyexecutives spent much of the remainder of the event responding.
CEO Sandeep Mathrani and DukeRealty Corp. CEO James Connor were among those who joined Zell inpredicting tougher times. Even executives who said a recession is coming,though, said the potential effect on commercial real estate markets wasuncertain.
Inan interview with Robin Panovka, a partner at law firm Wachtell Lipton Rosen& Katz, Zell — who, among many other business ventures, is chairman ofEquity Residential,Equity LifeStyle PropertiesInc. and EquityCommonwealth — mused on his late-2015 that a recession was likelyin the next 12months.
"Ididn't think I was pessimistic. I thought I was realistic," he said."I think that the U.S., at the moment, is doing pretty well. I don't thinkit's doing as well as the pundits would expect or hope that it is doing. But Ithink you have to look at the United States as part of a connected andglobalized world, and the rest of the world ain't doing so terrific."
Citingdownwardly revised growth predictions in Nigeria, he added: "For anemerging market like that, that's a disaster. And that's happening all over theworld, so I just don't think the United States can avoid it. … It's very hardfor me to imagine, at this stage in what has been a very weak recovery, thatwe're not in the ninth inning."
Question of severity
Zellhedged slightly, predicting a recession that, "to the extent that ithappens … will be a significantly milder version" than in 2007.
Still,he said high worldwide sovereign debt and weak energy markets are signs ofdanger and pointed to business at Anixter International Inc., a wiring andelectrical equipment manufacturer in which he is an investor and board member.
"Everysingle time over the last 30 years we've seen the projects slow down or getdelayed, sure enough, there's a recession around the corner," Zell said.At the moment, he added, "We're seeing all kinds of major projects beingdelayed, and at least, based on past experience, that has always led tocancellations and changes in the environment."
On alater panel, Mathrani said the real estate business would not see much of aslowdown in fundamentals in 2017.
Still,he added, "I've been pretty public that I think I agree with what Sam Zellsaid earlier today, which is that you will see a mild recession sometime Ithink post-election '17, early '18. And so it would be wise for us to plan ourbalance sheets for that to occur."
Connorsaid real estate executives broadly share those concerns.
"Thequestion we've all been asking, and we've been asked, for the last two years,is what inning we're in," he said. "My response is, we're now inextra innings. If you look at the average length of recoveries, we're30-something months beyond the average, and I think there have been only tworecoveries that have gone longer than this. So, is it going to end tomorrow?Probably not, but I don't know how many of us are really bullish about 2017 and2018."
Real estate impact
Forall the macroeconomic caution, though, the executives were split on the meaningfor real estate.
"Thereal estate industry is not going to perform very well in an environment whenthe economy is not performing very well," Zell said. While he denied"ringing any bell" about the peak of property markets with EquityResidential's $5.37 billion portfolio sale in January, he added: "If somebody needs abell ringing in order to figure out that the real estate market is pretty frothyright now, I'm in the business of selling hearing aids."
Mathrani,meanwhile, suggested that the A-mall subsector is relatively healthy, and saidREIT stocks could continue to fare well.
On adifferent panel, VEREITInc. CEO Glenn Rufrano sounded a dubious note about a recessionsevere enough to hurt tenants' rent-paying ability.
"Hardto believe that our tenants, because we haven't had this huge up-cycle, aregoing to be in a position where they're going to get crashed on their balancesheet," he said. "I just don't see it happening. And if that's thecase, I do think the real estate market's in relatively good shape. It's notgoing to go up, it's not going to go down, cap rates may stabilize. But it'snot a crash."
GordonDuGan, CEO of Gramercy PropertyTrust Inc., argued that bubbles are typically driven by debt, whilethe current moment is defined by constrained debt markets.
"Whetherthis is a late-stage commercial real estate cycle or not is a separate issue,but in terms of bubbles, we don't see anything," DuGan said.
"Idon't think we're on the precipice of a financial crisis," he added."I think the world's adjusting to very low returns. When the volatilitykicks in, what it's really saying is, investors don't want to lose money, butthey also can't hide in riskless assets, because riskless assets don't have anyreturn. … So we're adjusting to what I believe is a very low-growth, low-returnworld, and it will be interesting to see how all this plays through."