Consolidation will be the top story in commercial real estate for the next four years, according to market mogul Sam Zell.
Mr. Zell, a well-regarded real estate investment trust expert, said Friday that by 2000, the number of REITs will have decreased 10% to 15% because of mergers. Operating-scale efficiencies will motivate the consolidation, he said.
The chairman of Equity Office Properties Trust, Equity Residential Properties Trusts, and Capital Trust made his remarks at the New York University Real Estate Institute REIT symposium.
Mr. Zell has long been a coveted client of the banking community. Last September he tapped J.P. Morgan & Co. for a $1.5 billion loan to help buy Beacon Properties Corp. for $4 billion.
He predicted that consolidation among REITs will provide continued opportunities for commercial and investment banks that focus on serving the commercial real estate industry.
The "liquidity and quality of the currency" used for REIT mergers "is going to be more and more of a determining factor in consolidation going forward," Mr. Zell said.
Mr. Zell said he is not worried that bankers' renewed enthusiasm for serving the industry will worsen cyclical downturns in the real estate markets.
Though "the history of discipline in the investment banking business is similar to the historical discipline in war, the good news is that the investment banking business finds out relatively quickly when it lays an egg," Mr. Zell said, "so that Darwinian evolution will save us all."
But Mr. Zell said he is concerned that the equity markets do not understand the risk that development embodies.
"My concern is that the first time a public REIT gets into trouble, the investment community is ill-prepared for those surprises," Mr. Zell said. "That requires attention and focus going forward."