Lachman: 'demand-based' activity to return in 1995.

After four or five years of restructuring, an active market based firmly in demand will re-emerge in 1995, M. Leanne Lachman, managing director, of Schroder Real Estate Associates predicted last week.

One of the pre-eminent real estate forecasters, Lachman told a gathering of the Association of Real Estate Women at the Grand Hyatt Hotel that the 90's are a "bifurcated" decade. In the commercial sector, she said, we are in the midst of changes, that will last until 1994. The modifications include: a gradual absorption of excess space; a transfer of ownership from weak hands to strong; a permanent reduction of real estate employment by one-third; a reduction in value; no new construction; and the developing of new methods of financing.

The residential sector, excluding cooperatives and condominiums, she said, is not going through the same reshaping and there are already signs of recovery. Home refinancings are helping the economy because consumers are gaining extra cash each month. That should increase consumer spending. Consumer confidence is the main problem there.

Enter 1995

"Then we will return to activity serving demonstrable demand, she said.

Lenders will begin to fund projects again but they will want to see demonstrated demand. Activity will be "moderated", however, she said, because demand will be. There "won't be a construction loan made," she said, without a market survey done by an outside source. The latter half of the decade then will hold opportunity for market research and public relations firms.

Lenders Slow to Take

Back Assets

While many expected a "massive clearing process", Lachman said, there have been few distress sales by lending institutions and some are even putting money back into the assets by way of tenant improvements to attract tenants.

"Most financial institutions can't take the hit of foreclosure," Lachman said. They also, she said, don't want to see their investments sold for bargain-basement prices to "Sam Zell types", Most institutions, she said, are taking back only what they have to and building reserve for everything else.

"The foreign investors, especially Asian lenders, have a cultural resistance to taking back property. "Saving face often means working out bad loans with the borrower in place," she said.

Insurance companies, she said, are taking writedowns rather than resorting to foreclosure. If the insurer takes possession, it is valued at the lower of cost or market or the market value. They are then struck with low-value assets when they take back the property. Therefore, from an accounting perspective they would rather keep the owner in place.

Most typically banks are only repossessing the most |difficult' assets," she said.

There are almost no buildings, available, she said, for the several billion dollars in investment fund dollars today. "Many properties that should be for sale ... simply aren't available."

Low interest rates, she said, are highly beneficial for projects on adjustable loans and banks are willing to refinance, she said, if part of the loan can be paid to show the rating agency it is performing.

Securitized mortgage pools and REITs will become two important investment vehicles.

More lenders and developers will be amassing packages of commercial mortgages that carry a rating -- mortgagebacked securities.

"Traditional purchasers of bonds are desperately looking for advanced return opportunities," she said. "Because of strong investor demand, securitization is going to take off."

REITs, she said, will also emerge as a popular, publicly traded real estate investment. Last year REITS rose 36 percent. Large institutions haven't participated because capitalization is so low. The total capitalization of publicly traded REITs is currently $11 billion. In fact, she said the next wave of large property owners may be REIT investors.

"By the mid-90's, most pension funds will invest in real estate through their stock managers," she predicted.

Meanwhile, she said, only 100 or so of the largest funds will invest in real estate directly. While they desire portfolio diversification, she said, many are tired of trying to understand and monitor their real estate investments.

On the local scene, Lachman said, a return to national banking will mean people will have to return to New York.

In the meantime, before 1995, she said: "I suggest you be open and take advantage of any bits of luck that come your way."