Tom Uhlman/Bloomberg News

There are few people in commercial real estate more recognizable than Sam Zell. The chairman of Chicago-based Equity Residential (EQR), who is known as the grave dancer, made a name for himself buying distressed assets and building empires. He took some time to talk with Multifamily Executive senior editor Les Shaver about Equity Residential and the company's plan for 2011. MFE: How has Equity's strategy evolved over the years?
ZELL: I think you have to go back to the business that I was in before Equity was created. We were a very large apartment owner. We bought and sold apartments. We ran them, we fixed them up, and we converted them without any regard to what I would call performance numbers. We went into Houston, and we bought apartments there, and three years later we sold them and we did the same thing in Dallas. And then [we did it in] Atlanta. We made a fortune. Then we became a public company and, all of a sudden, capital gains weren’t anywhere near as relevant. It’s recurring income [that’s important].

MFE: What adjustments did you make to meet the demands of Wall Street?
ZELL: It became apparent to us that if we were going to get appropriate valuation for our company and, if we were going to be an owner of apartments as opposed to a serial buyer and seller for which we wouldn’t get credit, we had to shift to what we are today. We’ve moved out of Dallas, Houston, and Charlotte. These are low-barrier markets. Guys in these markets have a pickup truck and a hammer, and they are apartment builders. Access [to capital and ultimately new apartment supply], when times are good, is very high. In effect, if you’re holding period is potentially short, let’s say three years, that kind of market is fine. But it doesn’t benefit a public company. What you see is the morphing of the whole thing and moving Equity Residential from an apartment commodity owner to an apartment asset owner long-term.

MFE: That’s a long process.
ZELL: No kidding. I had hair when it started.

MFE: Are you happy with how this shift to high-barrier markets has turned out?
ZELL: I think we’ve created an extraordinary machine. I think we’re a leader in knowledge. Our activities in the past couple of years have shown that. We didn’t have to dilute. We took advantage of having liquidity when no one else did. At the same time, we shifted our whole portfolio to a bicoastal one, and I think we materially reduced the risk. Yeah, it was painful. Yeah, it may have pissed me off that people didn’t understand what I was doing and what the company was doing. But I’ve always been a long-term investor. I’ve never sold a share of Equity, and I don’t think it’s on the horizon.

MFE: You’ve always liked New York, specifically. What attracts you to it?
ZELL: You start with density. That’s no place in the United States where the density is as high as New York. New York is an international city. It’s a 24/7 city. It’s where every young college graduate wants to go for a couple of years. It’s a beacon. And for us to be national company and not have presence in New York made no sense. Consequently, that was one of our objectives in the repositioning of the whole company was to really become a serious factor in the New York market and we have been.

MFE: Why do you think so many companies avoid New York?
ZELL: You’ve got 50,000 garden apartments in suburban America, so the idea of going to New York City and buying a 20-story high-rise and dealing with a very different kind of tenant than the one you’ve had before, is a scary thing to do. Obviously, New York has not a bad record historically on rent control. That’s another reason that it scares people, but it also creates premiums. All in all, we’re thrilled to be in New York.

MFE: Has the multifamily recovery, specifically in the transactions arena, played out as you expected?
ZELL: I think, generally speaking, that which we bought and got was kind of in line with what we thought was going to happen. We went into this serious recession with 95 percent occupancy and it went to 93 percent. That’s not a lot of volatility.

It's funny. I’m supposed to be the grave dancer. I’m supposed to be the maven in economic distress in real estate. From the beginning of this how thing, I’ve told everybody, ‘Not this time.’ Sure, there will be some Stuyvesants and some obvious scenarios, but you won’t have the kind of issues that you have historically with those types of opportunities, particularly because the concentration is not in the banks and the cost of capital is zero.

MFE: Do you think more companies will try to become REITs in 2011?
ZELL: I think there have been a lot of attempts to create REITs. The problem is one of scale. If anything, I think the Street has learned since the dawning of the modern REIT era, that liquidity equals value. An awful lot of these companies that had relatively little scale and little size and therefore relativity little liquidity, became anchors, going straight down. That creates the problem of how do you create new REITs? You have to get scale and my guess is that things improve. I think some people will make some serious consolidations. Obviously, I think you’re going to see Hilton come back, and I think you’ll see Archstone come back, in one form or another.

MFE: Are there new acquisition opportunities coming up?
ZELL: I’m sure that there are and will be other acquisitions opportunities. The answer is yes.

MFE: How positioned are you to take advantage of those opportunities?
ZELL: We’ve, quite bluntly, taken a lot of shit. We cut our dividend and did a lot of things to get to where we are. But I think that where we are is where is where we set out to go. It’s rare that you set a strategy five or seven years earlier and fulfill it.

MFE: What are you most happy about in regards to Equity?
ZELL: I think this company has terrific management. I think it has a terrific set of leaders. I think [Equity Reesidential president and CEO] David Neithercut is a leader, and his status is recognized more and more everyday. I think there’s great pride in what’s been accomplished. It was basically discipline, conviction, and focus.

Editor's Note: This is an expanded version of an interview with Sam Zell that appeared in the January 2011 issue of Multifamily Executive.