Zell vs Sternlicht on The Future Of Real Estate
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Sam Zell and Barry Sternicht, former head of Starwood Hotels, faced off at the Milken Institute Global Conference in Los Angeles while discussing the future of the real estate market. These two are considered by many to be some of the most savvy real estate investors in the country. It is interesting to see the the divergent viewpoints from this Business Week article.
The venue for the Apr. 26 faceoff was the annual Milken Institute Global Conference in Los Angeles. Zell immediately dismissed inflation figures showing relatively benign 2% to 3% growth. “If you’re trying to build, you’re looking at 30% increases in construction costs in the past 24 months,” he said. The financier believes inflation will continue to hold real estate prices up. “I don’t think there’s bubble or any area with oversupply,” he said, before hedging by naming a few markets — Las Vegas, San Diego, and Phoenix — where he thought high-end condos were overbuilt.
Zell quickly shot down the notion that Americans have overextended themselves by paying too large a share of their income for mortgage payments. “In Europe, it’s more like 50%. Here, people think they’re pressed if its 20%,” Zell said. And if buyers get strapped, they’ll cut down on discretionary spending before they stop paying their mortgage. “We’re still the cheapest housing in the world,” he said.
Sternlicht counters:
Sternlicht took the opposite view. “This is too bullish,” he said. “One thing I learned on Wall Street is that the flow of funds overwhelms fundamentals. There are so many funds chasing the real estate game — oil sheiks, Hong Kong billionaires, hedge funds. This is a totally different market than even a year before.”
Sternlicht stepped down from the chief executive’s job at the hotel company he founded — the parent of the Westin, Sheraton, and W brands — two years ago. He now manages $10 billion of property for outside investors at his Greenwich (Conn.)-based Starwood Capital Group. Sterlicht said real estate prices have risen so high that returns have fallen to unacceptable levels.
“HOT POTATO MARKET.” One hotel he looked at recently in Aruba produced $14.7 million in cash flow but the owner needed $265 million to pay off his debt on the property. At that price, the investment would produce a return of just 5.5%. “I would pay $100 million less for it,” Sternlicht said.
The situation has all the hallmarks of the Internet bubble, Sternlicht said. “It feels like a hot potato market,” he said. “I have to think, ‘Who’s the bigger fool I’m going to sell it to?’” via Business Week.
I come from the Sam Zell viewpoint. Real estate in certain markets is definately overbought, but for the majority of the country it is still a very reasonable investment. As opposed to stocks and bonds, purchasing real estate allows your assets to grow while providing basic services and a tax advantage. Those factors make a huge difference in performance expectations.
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What an awesome way to generate traffic for a story. Were they trying to time that for Sweeps Week? ...
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Good point about people possibly holding off now. The 4.5 percent interest rate could be a self-fulfilling prophecy. 
wow this is a wonderful creation...............i would like to be there once even in my life time........... 
Absolutely agree with Jon, excellent site and very imformative. Keep reporting to us please! 
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Great Real Estate
post ... very interesting. 
Comment by John Doe on 1 May 2006:
Zell is a permabull. Sternlicht at least looks at the facts before making a determination. In the same token, to say that Europe spends 50%? Where in Europe did he live? Spain? Pish Posh. I lived in Germany, and that is most certainly not the case, but they don’t have an ownership society or a housing bubble. If you look at total housing spend, it is in line with ours for household budgets.
Overheated markets in the US are like the overheated European Markets. To compare urban Paris with Midwest US is pure baloney. I could do the same to compare Orange County with rural Poland. (if you use median incomes of either regions, it totally skews where you are comparing).
Is housing cheap in the US? Yes, because building is also cheap here. There, buildings are intended to stand up for 300+ years, not like our fall-down-every-20-years stick-frame built crap that crumbles at any stiff wind. You get what you pay for. And, the land is the real question. You can still buy land cheaper in Europe than you can in San Diego.
Comment by Howard Whang on 18 May 2006:
Sam Zell is still bullish. Europeans are still coming to find the good deal in US. Asians are having hard time finding good deals here in US. Central region seems still having a good times in real estate. Real estate market may not be as bullish as a year ago. But the market seems going steady and sober.