When Sam Zell Talks Real Estate, Investors Listen

Sam Zell is a real estate investing legend. He began his real estate investing career in college in 1961 and later founded Equity Group Investments. He recently spoke at the "Invest for Kids" conference in Chicago, detailing both his bearish and bullish views on the real estate industry.

Overall, Zell sees the private and public real estate groups in the United States as being healthy, which he described as having plenty of liquidity.

But he is bearish on the new sector that developed from the Great Recession, of buying single-family homes out of foreclosure and then turning the units into rentals. Zell noted that, due to his reputation, he had been contacted by many lenders to buy these properties. But he declined, pointing to the fundamental inefficiencies.

For example, a ten-unit apartment building only has one furnace and one roof to maintain and eventually replace. For ten single-family houses, there are ten of each to pay for in the future. That is very bearish for real estate investment trusts such as Silver Bay Realty Trust SBY, American Homes 4 Rent AMH and American Residential Properties ARPI. Those reasons, as well as other reasons to avoid those equities were recently detailed in another Benzinga article.

The market apparently agrees with Zell. Just for the week of the conference, American Homes 4 Rent is off by 2.55 percent, Silver Bay Trust is down 2.38 percent and American Residential Properties fell about  one percent. It has been much the same story for 2013, as these stocks have performed very poorly in a double-digit bull market.

Zell is positive on multi-family housing, though.The efficiencies are better and the demographics are more compelling. People are waiting longer to marry. There is a greater demand for urban living, which favors apartment buildings.

The suburban communities where many of the homes owned by Silver Bay Trust, American Homes 4 Rent and American Residential Properties are located are not as desirable...which is obviously why those houses went into foreclosure.

In addition, consumers prefer to rent now, which allows for greater flexibility in the future.

Zell predicted the small operators will eventually be marginalized in real estate. Major operators such as Westfield Malls are taking the prime space. Strip malls are suffering due to the impact of the Great Recession on small retailers. The expansion of Wal-Mart WMT into groceries and health care and the continuing growth of Amazon AMZN are certainly not helping, either.

For investors, there are many stocks to buy and many to avoid, based on Zell's remarks. Many, such as Apartment Investment and Management AIV, are in the multifamily sector that Zell likes. Silver Bay Trust, American Residential Properties and American Homes 4 Rent should be avoided. As the previous article on Benzinga advised, however, it is best to invest in real estate through the stock market, rather than direct ownership.