Norton on Real Estate

I recently returned from the spring meeting of the Counselors of Real Estate in Chicago. With a $175 round-trip fare on a Southwest direct flight, New Hampshire is connected to the U.S. and the world.

There were several sessions, but most interesting was the presentation by Sam Zell, chairman of Equity Residential Properties Trust, the largest apartment real estate investment trust in the United States, and Equity Office Properties Trust, the largest office portfolio of any publicly traded company in the United States. These are two of the country’s biggest REITs.

Sam is positive. He sees only slightly rising inflation and interest rates for the next six to nine years. This, coupled with lots of capital, makes real estate financing competitive. Competition translates into low interest rates.

However, not all regions will prosper equally. There are certain areas where housing is overheated and the bubble will pop. Las Vegas, Miami, Los Angeles, maybe San Francisco, are a few. In Boston (the marker for the Northeast), while housing prices have certainly jumped, overall prices are in the range of incomes. The consensus was only a 40 percent chance of a major pricing correction for housing in the Northeast.

Sam’s point was that now is an excellent time to buy real estate you want to hold on to. Low interest rates lead to good leverage. At the same time it is an excellent opportunity to sell properties you do not want to own long-term. Apartments, retail properties and some commercial are demanding very aggressive cap rates of 5 to 7 percent. (The cap rate is essentially the rate of return that the buyer/investor is willing to accept from the property. See “Commercial Notes” on page 40). Historically, cap rates of 8 to 10 percent were the norm for commercial real estate, and higher for challenged properties. However, today there are so few enticing alternatives that real estate looks good in comparison. So it is potentially the best of both worlds. A good time to sell (historically high selling prices) and a good time to buy (continued historically low interest rates derived from gobs of capital looking for opportunity).

The opportunities will be defined by the significant lifestyle changes in our society, including the deferral of marriage (seven to eight years) creating an urban educated America. This trend is increasing the number of households’ demand for 24/7 cities, which is augmented by the retiring baby boomers (77 million strong). The latter are unlocking a wealth effect, and despite a significant run-up in housing costs, U.S. real estate today is still the cheapest real estate in the developed world. This is true for the bricks and mortar as well as the land.

Of course, we cannot discuss real estate without the number one rule. Location, location, location! Cities like Pittsburgh, Detroit and St. Louis have been losing population for the last 50 years. Boston and smaller cities are growing. Invest where the people want to go. Keep in mind that in 2004, 76 percent of the U.S. economy was driven by the consumer.

Globally, people will want to invest in the U.S. (and its Treasuries) because it is stable, resilient and liquid. The euro will try to topple the dollar but that is far from certain. For now the U.S. and the real estate sector is the place to be invested.

Bill Norton is president of Norton Asset Management. In addition to his active brokerage work, he is a Counselor of Real Estate. He can be reached at

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