Recession likely in 2009: property mogul Zell

NEW YORK (Reuters) - Real estate heavyweight Sam Zell said on Tuesday the U.S. economy is likely to slip into recession next year, while the single-family housing market is close to bottoming out.

But on the downside, Zell, who earned the moniker "The Grave Dancer" for buying up distressed commercial real estate properties in the early 1990s, said office buildings that are not top quality or located in downtown city markets will see a long, slow downward spiral.

"This is not a time to own commodity (office buildings) in the suburbs," said Zell, speaking at the DLA Piper Global Real Estate Summit in Chicago. "If there's going to be a diminution of demand for office space, it's going to be out there."

The credit crisis has dried up sources of debt for commercial real estate, which is heavily dependent on borrowing to fund construction and acquisitions. This has stalled the construction of new office buildings.

"If there is no new supply, then high quality well-located prime real estate can only be terrific," said Zell.

"I don't think you're going to see much deviation in cap rates in high quality stuff," he said referring to capitalization rates which move in the opposite direction of prices.

However, many second-tier and suburban office buildings financed with large amounts of debt from 2005 to 2007 may squeeze their borrowers who are not able to refinance the principal when the interest-only loans come due, Zell said.

"Will the value of the real estate increase enough so that you can refinance the existing mortgage?" he asked. "My answer is not likely. If the asset is high quality, well located, they'll be salable and the equity is probably recoverable. If its second-tier stuff, I don't have much prospect for it."

Zell warned of wide repercussions if the U.S. Congress includes proposals to modify mortgages of borrowers in bankruptcy as part of a $700 billion federal bailout being hammered out.

"I think any legislation of any kind that modifies an existing contract is such a slippery slope that in effect I think it destroys the country," he said. "If I can't rely on a contract, I don't know how the system works."

Zell said that high oil prices, the collapse of Lehman Brothers Holdings Inc (LEHMQ.PK), the government takeover of mortgage lenders Freddie Mac (FRE.N) and Fannie Mae (FNM.N), and of insurer American International Group Inc (AIG.N), likely will kick the economy into a recession.

"Probably not until next year," he said. "I don't think it's going to be anywhere as near catastrophic as people envision."

But the single-family housing market, whose collapse is at the heart of the credit crisis, is close to the bottom, he said.

"I would be surprised if we don't see the bottoming out of the single-family housing market, and I make a distinction between single-family and condos," he said. "I really think that next spring is going to be a reasonable year."

(Reporting by Ilaina Jonas, editing by Richard Chang)