Bank asset sales to stabilize values.

After a year of institutional selling of both large and small packages of distressed real estate portfolios at steeply discounted prices, it is our opinion that 1993 will see a balance in the supply and demand characteristics of the market and that will have a stabilizing effect on values.

As economic conditions improve, activity in all sectors of the industry should also. As the market settles down, we should see slow but steady growth in both sales and financing throughout the coming year. The significant deterioration of values that has taken place should end.

As substantial amounts of assets were converted to institutional ownership through foreclosures, portfolio restructuring, bankruptcies and takebacks, all signs indicate there is a firming up of prices which we feel are near or very close to the bottom and momentum seems to be gathering as 1993 begins. Investors and user/tenants have been posturing and positioning themselves for a recovery. With values written down to levels as low as 50 percent of their original value, investing has become attractive to many.

A "New Real Estate Business" is beginning to emerge, one that will create vast opportunities and new challenges. Starting from this lower price base will afford excellent opportunities to generate income, capital appreciate and double digit returns. As an added plus the new administration is likely to propose a mix of pump-priming measures and is looking favorable towards some sort of tax relief for both private business and real estate. This is an excellent time to come back to the real estate business and a marvelous time to invest. It may well be that property is "underpriced."

Through the 1980's investors purchased properties with little or no return, typically cash-on-cash yields of 3 percent to six percent and in many cases even less. The investment objectives were tax benefits, inflation hedging and value appreciation. This did not happen. In order attract significant investment capital in today's "Bear Market," 10 percent to 12 percent cash-on-cash returns will have to be achieved coupled with, reasonable appreciation and safety to peak buyer interest.

Real estate is now being priced by its ability to generate cash flow. Investors are desperately seeking alternatives to the low rates being paid on CD's and Savings Accounts. Mutual funds that invest in bonds and common stocks are taking in cash at the fastest pace in history with no indication it will stop any time soon. At the present time 51.44 million Americans own stocks of which 2.4 trillion is invested in American Companies. This represents 21 percent of the total adult population. At the end of 1992 $476.6 billion went into stock mutual funds alone. This staggering amount comes from people investing out of desperation with little competitive options or alternatives available for investment diversification. People are just seeking reasonable returns of their money.

This pool of investors may well represent one of the largest potential sources of capital to re-enter the real estate business.

Multi-family housing in the 1980's was selling for as much as 10 times the annual gross rent rolls. Today the pricing is somewhere about four and a half times the annual gross rent roll.

Office buildings in Midtown in the 80's were being sold upwards of $150 per square foot. Today the pricing is as low as $35 per square foot, making these buildings very attractive to investors as well as tenant user/buyers who for the first time can in many cases purchase their own building at less cost than leasing comparable space.

Mortgage financing is still alive, well and available. However institutions are operating under a revival of what is referred to as "credit culture." This tends to refocus on the judgments of lenders trying constantly to balance the desire to earn profits by making loans and the desire to avoid loss by not making loans that are too risky. This instills the idea that credit quality is more important than profit opportunities, that comes with big risks. Many lenders got into trouble because they were profit driven to the point of not being as prudent as they should have been.

Institutions now lend with a low risk, no glitz strategy that they hope will keep them out of harm's way in all types to markets. We do not see any significant change in attitude this year.

There is still a growing appetite among lenders for good products.

One thing to keep in mind is real estate is a business driven by cycles. They can move up, down or sideways, but they never stop moving or stand still, not for a moment. 1993 looks to be a turning point with positive signs for a recovery. As more activity is generated and future absorption takes place, renewed confidence will accelerate and funding for investment will be available.

After 40 years of selling and financing real estate, I may just be a cockeyes optimist, but look at Rockefeller. He built Rockefeller Center in the height of the Depression, and look how that worked out.