Zell's Angels
The real estate mogul credits his success to trusting his instincts.

CHICAGO--In his office high above the Chicago River, Sam Zell, the real estate virtuoso and master investor, is talking about motorcycles. "I have had accidents over the years," he says, "but most of them while standing still. I'm actually a very, very good driver." In case I look skeptical, he adds a sweetener, his wife's verdict: "Helen rides in the back with me and this is not Miss Bravery or something," he says. "But you know, she won't let me drive a car. I get distracted."

He's hoping I'll catch the broader point, which is about managing risk--the subject we're actually here to talk about. In his three-plus decades in the business, Mr. Zell has built a fortune doing deals in industries and business cycles where few were keen to tread. He's come out with levels of success that left others wondering how they failed to see the opportunities that were there, plain as day.

The most recent of these high-wire acts was his sale in February of Equity Office Properties, the real estate investment trust he had built over decades, to Blackstone for $39 billion in cash. At the time, business publications were unconvinced. "Is he cashing out too early?" one headline asked.

Instead, as we now know, the sale was at the top of the market, and only months before the credit meltdown that has shaken up a financial system. So was he seeing portents of a tightening last winter that others weren't yet ready to acknowledge?

"Obviously, the deal that was done on Feb. 7 could not be done on Sept. 7," Mr. Zell says, while insisting that he's told everyone he didn't try to deliberately pick a market top so much as weigh the offer against what his own instincts told him was the right price. "Somebody made an offer that was wide by a significant margin of my own valuation. So I'm looking in the mirror, and any day you don't sell, you buy, and I wasn't willing to buy at the price they were willing to pay, so I sold it."

Blackstone is likely to do fine, he notes, with a group of properties that spans the country from One Post Office Place in Boston to Columbia Center in Seattle, though perhaps not as fine as the enthusiasm of the time suggested. It remains to be seen what will happen in the near future, he explains. "I tend to think that the commercial real estate market is kind of flattening after an enormous amount of rate compression and a tremendous rise in costs over a relatively short period of time. It changed valuations quite dramatically in a relatively short period of time."

He should know. The current illiquidity of the market may be a new experience for the young guns of real estate and private equity who got rich doing deals when money was cheap. Sam Zell, on the other hand, began to build his fortune in a market more similar to this one--buying distressed properties that no one wanted to get near. His M.O. during the early years earned him the nickname the Grave Dancer, and a reputation for nerves of steel. In the latter years, he observed that so much liquidity had entered the market, things would never be the same. So had things come full circle, I wondered? Could he end up back in the business he started in?

"An adequate description of me would certainly be a professional opportunist," he smiles, "I've always had my own perceptions of value, and I've always been willing to go forward and risk my own capital on whatever basis I believed. And on many of those occasions, it was really lonely. You turn around and look behind you and there's nobody else."

To hear him tell it, once he had assessed the risk, it was just a matter of time--the point is how to think about the risks you take, as well as the ones you don't. To this end, Mr. Zell has helped establish a center for the study of risk at Northwestern University in the Chicago area, a project inspired by his own experience teaching an undergraduate course on risk at the University of Michigan.

Going into it, he says, he wanted to teach a "Noah's Ark Class"--not just business students but students from all departments, English, architecture, math and so on. "I was intrigued by the way people take all kinds of risk all the time and don't know it," he says. "See, I'm a professional risk taker, but I'm a professional risk taker who understands all the risks he takes. A lot of people don't."

The same economic principles cross all boundaries, he says. "Other than designing rocket engines, or biotech or some high-tech stuff, business is business and risk is risk. And the ability to incur risk and the ability to make things happen, they are all the same."

In the current market, it's the fear of unseen risks that's on people's minds. As a condition of the interview, I've agreed not to ask about his landmark Chicago Tribune deal, but Mr. Zell isn't completely without his own exposure. Many now think the deal will have to be junked or rebuilt. Judging by the spread between his offer price of $34 a share and the current price of around $26 a share, the market is still questioning whether it is going to happen.

So we're talking about whether, when, and if the credit markets will get back to normal. He pauses and gets up. "Let me answer your question a different way," he says, heading over to a shelf along a bank of windows, where a row of decorative music boxes sits. These are Mr. Zell's famous music boxes--he's known for sending them to friends and business associates around the holidays. Each one contains a message and a song, on themes ranging from politics to the world economy. As he tells it, after getting chocolates or oranges ever holiday seasons, "the idea that I should send someone a calendar with my name on it was just beyond my measure." Instead, he sent economic forecasting machines disguised as music boxes.

He sets one whirring to life. The song it emits, to the tune of "Raindrops Keep Falling on My Head," begins "Capital is raining on my head / Everything is liquid / we're awash in cash to spend . . ."

That's how he saw things in 2005. What has changed now is not the existence of liquidity--there's plenty--but the will to use it. The problem isn't a sudden lack of money, but a lack of confidence from the people who control it. Resurrecting that confidence will be the key, and it's unlikely to happen in the near-term. That said, while credit panics may not be anyone's idea of fun, their benefit is that they begin to restore some sanity and caution, keeping the animal spirits in balance.

"We haven't even begun to see the fraud that went on here," he continues, pausing to put on his best Professor Risk face. Imagine you're a broker on a starter home in California and it's a $500,000 loan to a guy who makes maybe $45,000 a year, he says, and someone just changes the numbers and the loan goes through. "Two days later, some investor in Poland owns it. You're out. You got your money. . . . What disciplines you?"

So did we get carried away with the notion of homeownership as part of the American dream? "If you need to come up with some kind of a really sophisticated journalistic approach, I think what you could basically conclude is that the country can't afford more than 65% homeownership, and that when we start pushing . . . you create a disaster. You push a bunch of people who can't afford it into the homeownership dream, you have builders overbuilding, you have brokers overselling and it always ends up badly."

The public-policy arena has now turned to efforts to protect the subprime borrowers from over-easy credit in the future. But the machinations of political types don't seem of much interest to Mr. Zell, whose office greets visitors with life-size statues of porcine bureaucrats--one wrapped in red tape and the other doing a six-legged "bureaucratic shuffle." "It would be unfortunate if this also became a political football," he says, "but to be honest with you, it's just like publicity-seeking political committees . . . they always look for a scapegoat, and they always look for victims. No matter what the subject matter is."

To get away from it all, there's always Zell's Angels, his very own motorcycle gang that takes trips around the world together, most recently riding the Dalmatian Coast from Trieste to Albania and back. Mr. Zell has about 15 motorcycles for his purposes, he says, but they're all the same basic kind, he tells me--sport bikes--fast and with a lot of torque. He knows exactly what he's dealing with. "I'm about as focused a motorcycle rider as you have ever seen."

Ms. Levy is a senior editorial writer at the Journal, based in Washington.

EMAIL THIS FORMAT FOR PRINTING RESPOND TO THIS ARTICLE READ RESPONSES
ARCHIVE

Return To Top

Customer Service: |         News Licensing   Advertising   About Dow Jones