Finances seen driving real estate market.

Has "Location, Location, Location" been replaced by "Finance, Finance, Finance?"

Yes, according to real estate investment banker Peter C. Haeffner, Jr., CRE, president fo Sonnenblick-Goldman Company, speaking before a crowd of 400 at the first luncheon of the year sponsored by The Building Owners' & Managers Association of Greater New York, Inc.

"What makes real estate work is the availability of financing, the dollars put behind a project," contended Haeffner. "I honestly believe it's the dollars that drive the transactions in the business -- everything else stems from this.

"In pre-crash 1987, an abundance of funding flowed easily into real estate, with its highly attractive risk-reward ratio," he continued. "Commercial banks (both domestic and foreign), insurance companies, pension funds, finance companies and thrifts all were aggressive lenders and/or buyers of real estate.

"Wall Street opened up the capital markets to assorted real estate products. With readily available funding, builders built, and buyers bought."

Today downsizing is the order of the day for the above institutions, and there is also an absence of major Japanese, German, United Kingdom and Arab investors, Haeffner said. Citing the lack of user demand, the investment banker described today's scenario as one where "we're working off the inventory created when money was readily available. This happens in any classic oversupply situation. In many ways, our current situation parallels the junk bond market of three years ago."

Where is the market mow in the cycle? Money today is mainly flowing from two sources, explained the real estate investment executive -- the Wall Street fixed-income funding sources for pools of debt, and vulture fund opportunist for equity.

The current activity is spawned by the RTC and other liquidations of troubled portfolios of loans and properties which owners are not interested in or are incapable of managing. According to Haeffner, the debt buyer acquires these assets as income investment vehicles after applying a rigorous set of management and investment criteria.

The second market of opportunistic buyers is acting much like Olympia & York, for example, did in the mid 1970's -- buying now to own in the future as the cycle reverses itself. Investors are even acquiring debt to obtain equity interests, and like their Wall Street counterparts, some of these investors ar not necessarily real estate professionals either, Haeffner cautioned.

These acquisitions still do not address the question of the large percentage of vacant space and the repricing of the entire rental scale, Haeffner reminded the audience. The "user in this market is the true beneficiary of this distress."

There is also a rapidly emerging need to measure performance--not in terms of minimizing losses, but in terms of throwing off income, he continued, "which is difficult to achieve with owners focusing on reducing costs to reduce debt."

While there is no immediate upturn to the direction of the current market conditions, Haeffner does see the reemergence of smaller institutions, thrifts and insurance companies into the business in the not too distant future. "As hard to believe as it is now, we may see the early 80's recast in |90's style--with buying and developing picking up notably during the mid to latter portion of the decade."