How Sam Zell Became a Real Estate Mogul
Although Chicagoan Sam Zell is best known for owning such famous media properties as the Los Angeles Times, Chicago Tribune and New York's Newsday, Zell's fame and $5 billion net worth ultimately originate from his mastery of real estate investing principles. This mastery, repeatedly demonstrated over a 50-year career, results from Zell's acute understanding of real estate market mega-trends and his dedication to turning around troubled properties.
Even in childhood, Zell combined canny entrepreneurial sense with do-it-yourself determination. As a young boy in Chicago, where he was born to Polish refugees in 1941, Zell began his business career by buying copies of Playboy magazine and reselling them to neighborhood boys at a 600 percent markup. He applied the same principles when he entered real estate investing in the 1960s. Zell, who received his bachelor's and law degrees from the University of Michigan, talked himself into a property management role with a local landlord. Soon Zell began to buy distressed properties, fix them up, and rent them to students. Zell was a hands-on landlord who put a lot of energy into scouting and fixing up locations.
Diversification and Opportunity
In 1969, Zell and his partner Robert Lurie formed Equity Properties Management Corp. to centralize Zell's rapidly diversifying investments in real estate. In the 1970s, Zell expanded beyond his initial interest in residential real estate and began to acquire office space under the aegis of Equity Office Properties Trust, or EOP. Zell structured his business as a series of real estate investment trusts, or REITs, under the Equity umbrella. EOP was one REIT; Equity Residential Properties Trust was another. The REIT structure allowed Zell to reduce his corporate income taxes radically. In addition to exploiting the REIT tax structure, Zell polished his skills as a salesman and convinced an increasing number of investors to entrust their money to him.
Equity Properties Management grew throughout the 1970s, but it was not until the 1980s that Zell saw his opportunity to become a big-time real estate mogul. In the mid-1980s, U.S. real estate crashed, and Zell swooped in to acquire office and residential properties at fire-sale prices. He also got more deeply involved in the manufactured-home business, which would become another branch of Equity Properties Management. When real estate rebounded, Zell realized vast profits from his investments. He began to spread the wealth—for example, by buying Anixter, best known for manufacturing computer and Ethernet cables. He purchased the company in 1987 for $600 million and today it is worth eight times that much.
The Anixter investment was typical of Zell's strategy because he tended to invest in relatively anonymous properties. Zell's real estate portfolio remained remarkably undistinguished over the years—a workaday collection of individual properties that were not necessarily spectacular in themselves.
Shortfalls of the Equity Brand
Zell's crowning vision in the early part of the 2010s was to turn all of his Equity Properties Management REITs into strong national brand names. Previously, the only real estate mogul to get branding right was Donald Trump, but Trump's aspirations were limited to higher-end residential and commercial tenants and moneyed casino enthusiasts. Zell wanted his brands to appeal to residential and commercial customers at various income levels across the country.
The primary purpose of the branding exercise was to leverage Zell's gigantic office-space holdings. The idea was that the Equity name would persuade enterprises with many locations to buy all their office space from EOP. It did not prove to be a winning strategy, as EOP discovered that enterprises tended to buy office space based on local differentiators such as price and management, not on national differentiators such as brand name. Zell had to sell some office space for less than what he paid for it, but this did not cost him his whole empire—though he did suffer a $1 billion loss.
Zell sold EOP to Blackstone for $36 billion in 2006, signaling the end of an era in his professional life. In 2007 (then in his mid-60s), he decided to get back in the game, this time as a newspaper mogul, acquiring a portfolio of newspapers owned by the Tribune Co., including the Chicago Tribune, Los Angeles Times, Newsday and Baltimore Sun.