Prospecting in the Real Estate Rubble

Article excerpt

The realestate market is comatose. After a prolonged illness attributed to an overdose of euphoria, it slid into a coma in mid-1990. Signs of the developing crises were visible as far back 1982: money cost more than lenders were earning on deposits, wholesale blocks of real estate were being securitized, and developers were starting projects all over the country with little demonstrable demand for the space. By 1986, the looming trauma was obvious; but the market, driven by new money from institutions and pension funds, continued to boom until early in 1990 when, abruptly, everything stopped.

The history of past cyclical downturns suggests that the present market conditions offer cautious investors a profit opportunity that comes around only once about every five to ten years.


Regional pockets of distress notwithstanding, national real estate prices climbed vigorously through about the second quarter of 1989. They then began to flatten in all sectors except apartments, and by the first quarter of 1990 prices for retail and office properties were tending downward. These first-quarter declines were more than offset by continued strength in the apartment sector, so the composite property index reported by the National Real Estate Index continued to climb slowly until the second quarter of 1990.

During the second quarter the apartment sector also sagged, and the composite index edged downward. By mid1990, real estate markets were comatose. The real message being delivered by the market was not in modestly declining prices, but in the virtual absence of transactions.

Because major real estate transactions are episodic and are negotiated in an imperfect market, downturns are signalled first by shrinking volume rather than by price declines. Property owners discover that values have slipped below purchase prices-indeed, in many cases, below remaining mortgage loan balances-and they simply refuse to sell during the early phases of a decline.

Receding transaction volume was painfully obvious in the real estate brokerage community by the middle of last year. Many commercial and industrial brokers were consolidating their operations to reduce overhead and protect their market positions, while others were aggressively seeking salaried jobs. In an open letter to members, the president of the Society of Industrial and Office Realtors reported that " . . . the institutional investment real estate market has basically come to a screeching halt. It is almost nonfunctioning." Foreign capital which had been a major factor buoying U.S. real estate markets, he said, contracted sharply in 1990, and mortgage lending activity in this end of the market virtually ceased.


The transition to a new calendar year finds the economy of the Mid-South and much of the U.S. sloshing through a periodic purge of excess real estate inventory and unneeded development capacity. Because our inventory-land and buildings-has a long "shelf life," elimination of the excess depends on growth in market demand for the product. During recessions or even periods of relatively slow economic growth, this correction can take from several months to several years.

Pick randomly from contemporary business periodicals and you get the same message, real estate is the wrong game to be playing. With high-profile projects and big-name developers forced through the financial wringer, and with major mortgage lenders bumping into each other in the crowded corridors of bankruptcy courts, pessimism has become chic.

Yet, in the previously-mentioned letter to members, the president of the Society of Industrial and Office Realtors concluded by observing that this may be "the finest opportunity for real estate investment since the Depression ..... In a similar vein, Barnard Mendik, who has an equity position in 14 large Manhattan office buildings and thousands of New York area apartments, recently told Forbes magazine:Did you know that [most of the] fortunes made by New York city guys on the Forbes Four Hundred [list of the country's wealthiest people] were made in about two years? …