IN THE NOT-TOO-DISTANT PAST, THE REAL estate industry was considered by most as one of the last inefficient frontiers: an investment class where, with a little luck and perhaps a lot of "inside scoop," one could do quite well. Unfortunately, the converse of this axiom was also true, and the massive losses this sector suffered in the late 1980s and early 1990s proved that imperfect market information could lead to disaster.
The well-documented facts are that real estate markets entered the late 1980s recession burdened with significant oversupply. This supply problem was caused mainly by inappropriate tax laws and undisciplined borrowers and lenders.
The tax laws before 1986 encouraged real estate development solely for tax shelter, versus economic rationale. This drove unprecedented levels of equity into development. Meanwhile lenders, primarily banks and savings and loans with little effective regulation, flush with money to lend from recent initial public offerings (IPOs), essentially threw money at developers. The overbuilding and declining demand of the recession caused many projects to fail. This led the lenders to foreclose, catching the eye of the bank regulators, which in turn forced the banking industry to tighten credit standards. With tight credit, the real estate deals not initially in trouble soon experienced defaults as the absence of liquidity in the credit markets precluded their ability to refinance. This reality had the insidious effect of spiraling the industry into still further recession.
The following dramatic structural changes have occurred in the real estate industry over the last 10 years that have had a maturing effect on this asset class:
* Technological advances
* Public equity ownership expansion
* Public debt investment expansion
* Segmentation of real estate capital markets
The technological advances have served to disseminate industry data that before was often closely held or simply cumbersome to assemble and evaluate. The automation of county registries of deeds, as well as market intelligence on construction, leasing and lending activity, are now tracked, and made widely available for most markets across property types.
A decade ago, private families or life companies owned much of the country's real estate without disclosure requirements. The result was a lot of guesswork on what was going on in the market. Often, these owners would not want to reveal the existence of problems for either competitive or denial reasons. The effect, however, was for the industry to continue to overdevelop six to 18 months into a recession. …