The late Sam Zell was the largest owner of RV Parks in American history – and he was a huge fan of unstable economic times. In this RV Park Mastery podcast we’re going to review what Sam Zell might be saying about this current chapter in America.
Episode 132: What Would Sam Zell Say Right Now? Transcript
When it comes to real estate, Sam Zell is the GOAT, the greatest of all time. The largest owner in history of three different sectors of real estate: Office buildings, apartment buildings, and RV and mobile home parks. Now Zell passed away a couple years ago, but he was the master of times when the American economy was in distress, when it was unstable. In fact, he had to name the grave dancer because of his inexplicable ability to avoid ruin, to come out ahead every time there was some kind of national economic shock or setback. This is Frank Rolfe with the RV Park Mastery Podcast. We're all aware America right now is in a bit of turmoil, to say the least. We're like teetering on the edge of recession right now. And it brings to mind, what would Sam Zell be doing right now? If he was here, what would the late Sam Zell be doing to better his position to come out of all this instability and come out ahead? Well, let's kind of break that down into some of the things that Sam Zell was known to be good at and how that would apply to RV parks today.
The first thing that Sam Zell would be doing is he'd be out there buying bad debt, because Sam Zell loved to buy things when good assets became in trouble. And there's not a whole lot of RV park bad debt out there 'cause most RV parks don't fail on a regular basis. And I'm sure Zell would be concentrated right now in office buildings and apartments as neither of those sectors are doing particularly well. Office buildings are doing terrible, in fact. In some markets, office vacancy is at 30% when it was modeled when they got their mortgages at 5%. And the loss of some of these buildings is staggering. One building in New York recently sold, I think, at a $300 million loss. It was astounding. It was valued at one time at $500 million. I think it sold for $200 million at auction. So Zell would be doing that kind of stuff, but that doesn't mean if you can't find an RV park in trouble, you shouldn't try and buy it because that's what Zell, the grave dancer, was great at, was he knew that in bad times, there were opportunities, and he loved to jump on those. So the first thing, he'd be sifting around, watching for situations where you have an RV park being sold by a lender, maybe in default on their loan, maybe nearly default on their loan. He'd be watching for those kinds of opportunities.
He'd also be refinancing well ahead of the commercial real estate apocalypse on the deals that he has. If you have an RV park right now and the loan's coming up for renewal here in the next year or so, this would be an excellent time for you to go forward and get it refinanced early. There's this thing hanging around the real estate industry now for a while, which people call the commercial real estate apocalypse. And what it is is it's the simple fact there's about $2 trillion of debt, enormous number, $2 trillion of real estate debt that comes due over the next couple of years. And a whole lot of it, namely almost everything in the office sector, the retail sector, even a lot of the self-storage sector and industrial sector, they're gonna go under. They're never gonna make it. We all know that instinctively. We go to the mall and we see all the empty spaces. We see the giant strip center where one of the three anchors has been shuttered. We drive downtown at night when the lights are on when people are cleaning offices and we see that there's no one in about a third of the office building.
So we all know bad things are about to occur, but the lenders don't wanna accept that. They follow a strategy called extend and pretend. Extend the date the loan comes due and pretend it will all work out, but this time it won't because society has changed. People now work remotely or businesses have downsized. They don't need those office buildings anymore. And we all shop online, Amazon, eBay. We don't need retail stores anymore. As a result, these things aren't gonna turn around. And when the losses finally hit those banks, it's going to be crushing. In the Texas Savings and Loan crisis, 3,000 banks failed. America went nuts when three banks failed a few years ago. Imagine 3,000 at one time. So if you don't wanna get stuck on the wrong side of that, it's a good idea to be refinancing now. We don't know when the commercial real estate lending apocalypse will in fact hit, but we know it's going to be the next few years in all likelihood. So I wouldn't want to wait until it's happening to refinance because you might get stuck in the mess.
So if Zell had some debt coming due, he would definitely be on that. Zell would also be looking at RV parks that are of the higher calibers because lenders, when times are tough, typically go to a flight to quality stance where they only want to finance things that have at least good basic dynamics. And this is probably true for RV park buyers as well. This is probably not a time in which you want to stretch to buy things that are questionable. Questionable markets, questionable infrastructure. You wanna buy basically your standard bread-and-butter deals that you know are going to work. Don't try to do anything on the wild side. Try to only do things that you know are gonna at minimum be base hits because that's what the lenders wanna see people doing. And it's very, very hard to buy RV parks in the absence of debt. Also, if Zell were here, he would be so excited right now. He would be doing cartwheels because he knows the interest rates are about to go down. Now, I think everyone who's old, such as myself, instinctively knows this to be the case, but younger people don't. They haven't been through that many recessions, if any. If you look back at all the recessions of the past in 1950, in every single case, whether it was the dot-com or the Great Recession, interest rates have dropped an average of about three points.
So when the recession hits, which we may already be in, it's a good bet interest rates will drop three points. And what happens when interest rates will drop three points? Well, it's simple. Any deal you bought, you look like a genius because you bought it at a cap rate of X. And once that spread widens by three points between cap rate and interest rate, your deal will look golden. It takes a three-point spread to have a 20% cash-on-cash return. That means if you bought a deal at a zero-point spread and the interest rates went down three points, you'd have a 20% cash-on-cash return. The best time to buy real estate, in fact, if you look at it historically, is right when the economy turns and interest rates begin to decline. So Zell would be extremely excited about this, not only on the deals he already owned, but on the deals he hadn't bought yet because there is simply no better time to buy an RV park than when the interest rates go down. Also, if Zell were here today, he would also be at the ready, which made him the grave dancer, to take on any problems he had. There's an old saying by Winston Churchill, approach success like a gentleman, but failure like a man.
Zell was not afraid to go in a room and renegotiate debt, renegotiate terms on almost anything, because he knew instinctively that to survive in bad times, you had to be an active participant in getting things reworked. And on any deal he had, he would be the first person to pick up the phone and call the lender and renegotiate the payments, whatever he needed to do to put things in good order. And everyone should follow that general rule on whatever you own. And if you own an RV park and there's a problem with it, take that problem head on and attack. Maybe you need to change the manager out. Maybe you need to talk to your lender about trying to get maybe an extension of when the deal comes due or possibly a lowering of a payment. But don't just let things sit and fester. That's part of what made Zell the grave dancer was he was the first guy to stand up and start dancing when things were happening. He always was obsessed with mitigating risk. He was always obsessed with liquidity. But if you read his life story, he got that way from back in the early days managing apartments while a student in college. He was a very hands-on guy.
I saw him speak at an industry event here many years ago, and you saw he was really a man of few words. He didn't like to talk a lot. He only believed in action. To him, that was the most important. And at times like these, when the economy is unstable, when people are freaked out, when things are going weird, it's a really good time to take action. Those who succeed are those who will be moving forward, not letting people try and depress them or hold them back from their destiny, but actually take an active hand in getting the job done. This is Frank Rolfe with the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.