Moguls see opportunity in distressed debt

Several of the country’s biggest real-estate moguls say they see opportunity in distressed debt — not bricks and mortar — in today’s real estate market. “I wouldn’t invest in U.S. assets today, but I would buy U.S. paper,” said Sam Zell, chairman of several real estate investment trusts, including Equity Residential Properties Trust (EQR), Equity LifeStyle Properties (ELS) and Capital Trust (CT), at the 13th annual New York University REIT Symposium in New York, yesterday. “The opportunity is on the debt side, not the equity side.” The commercial real estate market isn’t facing the oversupply problems that it did in past cycles, Mr. Zell said, noting that the frozen debt markets have limited the amount of new properties being built and dumped onto the market. “We’ve had nine or 10 months of literally nothing new getting started,” he said. As a result, the overbuilding and oversupply problems that led to property fire sales in past cycles isn’t occurring, Mr. Zell said. “I don’t think we’ve seen any significant distressed commercial real estate to date,” he said. “I think it’s going to take some time — if we even see any at all in this cycle.” William Mack, founder of Apollo Real Estate Advisors LP, a New York opportunity fund, and chairman of Mack-Cali Realty Corp. of Edison, N.J., agreed. “This is better than other downturns because there is no overhang of space,” he said. However, Mr. Mack cautioned that if the market experiences significant job losses, demand for office space will pull back, resulting in oversupply problems down the line. Steve Roth, chairman and chief executive of Vornado Realty Trust, said that it is difficult to value properties today because there are few transactions. Mr. Zell and Mr. Mack said that the economic turmoil isn’t as severe as the doom-and-gloom pundits, politicians, and newspapers claim. “We have a world where too many people have a vested interest in creating a recession,” Mr. Zell said. “You have two political candidates who are going out of their way to dual each other with dismal scenarios for the future,” he said. “I think the problem is nowhere near as severe.”