Sam Zell on Retail Real Estate: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Sam Zell of Equity Group Investments who gave his thoughts on the retail real estate industry.


Sam Zell's Invest For Kids Chicago Presentation: Retail Real Estate

There have been “bearish overtones” to each of the past five annual gifts that Sam gives to his friends/partners.

Retail real estate – most people agree about a decline here, but online is still only 8.5% of total retail; it is very early in tech’s impact; everyone is trying to catch a falling knife; where’s the bottom and what’s an appropriate cap rate – open questions; best malls are OK because they’re mini downtowns, and on the other side the strip-center convenience-driven stores are OK – everything in between is an oxymoron; USA has 5 square feet per capita more retail real estate than any other nation; a lot of retail could go away and nobody would notice; Sears, Penney created malls as anchors, but now they are the “anchor” dragging everyone down; free rent is still too expensive if there is no traffic; might be 1-2 years left on a lot of bad leases – big changes coming; we’ll always have some retail, but unclear as to what the right price is.

Taubman is selling at a 6.3% (?) cap rate, but look at some of their peers and look at some of the tenants – who will fill empty stores/leases?  The growth of passive investing and indexations and ETFs is very, very dangerous; many real estate companies now have heavy ownership from entities who aren’t real owners; something will precipitate a regulatory change; ISIS = ISIS; ETFs are untested in a downturn; markets should be about capital formation and price discovery, neither of which apply to ETFs

With low rates, the burden of carrying cash is as low as ever – a great option to hold.  Things don’t grow to the sky – we’ll have a correction eventually.  There is a reasonable chance of tax reform getting done.


For more from this event, check out the rest of the presentations from Invest For Kids Chicago 2017.

Baupost Group Provides $300 Million in Commercial Real Estate Project

According to the Atlanta Business Chronicle, Seth Klarman's Baupost Group will provide $300 million in equity to restart the "Streets of Buckhead" commercial real estate project in Atlanta, Georgia. Oliver McMillian Inc has purchased the luxury project and plans to start building this year.

We're highlighting this news because it ties directly into what Klarman said last year: he's finding opportunity in commercial real estate. The caveat with that statement, of course, is that he's been focused on private real estate.

In a time when Baupost sees less opportunity in the markets and has even returned some investor capital, this is an example of where Klarman is putting money to work. It's not very often you hear updates on what Baupost is doing, so we wanted to highlight it for those interested. For more from this great investor, check out Seth Klarman's recommended reading list.

Delinquencies Still Rising

(click to enlarge)

I'll let the picture do the talking here. Taken from Calculated Risk, we see continued rising delinquencies across the board in Residential Real Estate, Commercial Real Estate, and Consumer Credit cards.

How to play it:
- Short Commercial Real Estate (short CBG, short GGP, long SRS)
- Short Credit Card Companies (short COF, short DFS)
- Short banks with lots of leverage, lots of derivative exposure, and lots of residential/commercial real estate exposure (short HBC, WM)

One caveat with all those picks: You've got to monitor your positions like a hawk. The slightest bit of positive news can send these things skyrocketing due to short covering. Use stops, use your brain, and be swift.

Full disclosure: At the time of publication, MarketFolly was short COF, CBG, WM, GGP, HBC via puts