Zell Says Refinancing Is the No. 1 Risk for Investors

Yesterday at Marsh’s 2011 Global Real Estate Conference in Chicago, real estate magnate Sam Zell said the biggest risk facing commercial real estate investors is refinancing. In a Q & A session with Marsh’s Jeff Alpaugh, Zell was blunt: “There’s massive debt at 4 percent or 5 percent. What happens if, at the point of refinancing, rates are at 6.5 percent?” Zell’s company is structuring investments to limit refinancing risk by extending maturities and reducing leverage to around 35 percent vs. 70 percent, he said.

Zell also cited the problem of “zombie owners,” who have no equity but control the real estate, and said the criteria for evaluating borrowers needs to be re-examined. “There are a lot of loans out there that are current that have no chance of paying down the principle when it comes due,” he added. This situation, in part, has kept Zell from pursuing distressed assets, which helped to clear out the market in past downturns. “Pricing on distressed assets has been higher than any previous period of difficulty,” he said.

But Zellalso sees opportunities, particularly in emerging markets. In addition to Brazil’s favorable long-term prospects, he noted that Mongolia is poised to become a favorite market among investors. “It’s hard to imagine any currency outperforming Mongolian currency in the next five years,” he said.

As for the U.S., Zell confirmed that high-barrier-to-entry multifamily markets are heating up but cautioned investors looking for opportunities in secondary markets with developable land: “If you buy at the bottom in markets such as Dallas and Atlanta, you’d better sell at the top.” He also mentioned “the huge market of single-family rental houses,” but said that he is still trying to determine whether this investment sector is economically viable.