After a decade of boom and bust, real estate is moving slowly, but steadily, toward market equilibrium - vacancies are falling for almost every property type; lenders are keeping the lid on new construction; funds for refinancing are readily available; and even conservative investors are once again considering real estate.
Yet the mood remains uneasy. "It's a warm market, not a hot one," says Leanne Lachman, managing director of Schroder Real Estate Associates.
In part, this lack of enthusiasm is a fear that the excesses of the 1980s will be repeated. In part, it is a fear that they won't. "The real estate industry is always waiting for the next boom," says David Birch, president of Cognetics Inc. "If things are going well, they assume that another boom is around the corner. This time they are mistaken."
The 1996 Emerging Trends in Real Estate, published by Real Estate Research Corp. and Equitable Real Estate Investment Management Inc., notes that while 1996 presents a positive picture for investors, "it is one thing trying to give lip service to . . . a recovery without lavish performance gains, . . ." but "quite another to experience the certainty."
A Small, Hot Spark
If the go-go spirit of the 1980s is alive at all, it is in the lending arena. "Capital has come back into the market more quickly than many expected, in part because real estate investment looks good compared to the alternatives," says Richard Kateley, executive vice president of Heitman Advisory Corp.
"In the first two quarters of 1995, everyone was back in the market," says Jack Cohen, president of Cohen Financial. "Then the allocations ran out, and the third quarter almost shut down."
Life companies have resumed their role as big-ticket lenders after whittling down their delinquency rates from 5.24 percent in 1994 to 3.58 percent in mid-1995. Commercial banks are again making mini-perms and even a few construction loans, according to Emerging Trends. The fears of a few years ago that the $110 billion per year of loans that must be rolled over in 1996 and 1997 would have no takers has largely disappeared.
Improving real estate fundamentals account for much of the new enthusiasm. In addition, a recent ruling by the National Association of Insurance Commissioners significantly lowers the capital reserve requirements for commercial mortgage-backed securities (CMBS) (0.1 percent for CMBS, compared with 3 percent for real estate loans). This long-awaited decision should encourage life companies and banks to securitize existing loans, freeing funds for further lending. Efforts to standardize loan documents and improve credit enhancements have also helped revive the CMBS market.
VALUE CHANGES: FIVE YEARS AND TEN YEARS
Property Types 5-Year Forecast 10-Year Forecast
Hotel 30.3% 47.2%
Suburban Office 27.4 45.6
Apartments 22.3 42.6
Industrial 24.4 41.9
Regional Malls 19.6 40.1
Downtown Office 20.3 39.1
Research & Development 20.6 37.4
Community Shopping Centers 17.4 33.3
Power Centers 16.7 32.1
Source: Emerging Trends interviews, Summer 1995
The free flow of capital has raised some concerns about new rounds of construction. "There are already deals in the pipeline that were not funded in the early 1990s, so building activity can start more quickly," notes Stephen Roulac, managing director of The Roulac Group. Roulac also notes that today's land use approval process can be less cumbersome than two decades ago, which also helps projects reach the market faster.
Yet, even with the surge in lending, the slow, but steady, mentality persists. …