National vacancy rises in major cities.

National vacancy rises in major cities

A recently issued Salomon Brothers report says, in addition to the marketplace adjustment in property values already well underway, a number of more proactive steps could help speed recovery of the real estate industry.

The publication, "Real Estate Relief: A Prescription," cites a number of possible scenarios that hold great promise for minimizing the damage from the near-Depression conditions in the industry. The measures include the adoption of macro-economic growth policies at the Federal level, the use of immigration to boost the economy, adjustments to regulations for lenders to help deal with the credit crunch and the application of securitization of debt and equity as a financing technique.

"The invisible hand of the marketplace has already lowered relative values in real estate and re-priced properties in most categories to levels likely to provide long-term appreciation opportunities and to re-attract investors, especially from abroad," said J. Steven Manolis, a Salomon managing director and head of its real estate investment banking unit. "But because the current slump is much more than just a cyclical downturn, stimulative action may be necessary to limit damage to the industry."

One change that could strengthen prospects on the demand side, the report says, would be an increase in the numbers of immigrants allowed to settle in the United States.

"Historically, increases in immigration have created a deeper labor pool and been associated with upsurges in national productivity and gross national product," said Manolis. "Were immigration to increase for some reason, the positive effect on sales and rentals of apartments, single-family homes, retail space, industrial facilities and office buildings would shrink surplus inventory on the market."

In the financial arena, the report says that securitization could be "part of the cure," as the scarcity of capital sources makes desirable greater interaction between real estate and capital markets. Another factor that could lead the industry towards securitization is the need for improved liquidity, the report says.

"Pension funds have growing potential as a source of capital for the real estate industry, yet lack of reasonable liquidity could limit their commitment to property as an asset class," said Manolis. "Securitization is the logical avenue to get around that problem."

Macroeconomic policies aimed at stimulating growth and holding down inflation could also have a significant effect on real estate's recovery, the report says. If fears of inflation are kept in check, the publication says, the resulting fall in long-term interest rates could raise real estate values, while easing debt burdens, thus reducing delinquencies and foreclosures.

Loosening regulatory constraints in the banking industry could help the real estate business by easing the credit crunch, the report says. The report cites new approaches to dealing with troubled credits, which, if adopted, would allow loans to be split into "good" and "bad" pieces on lenders' balance sheets. Further regulatory relief could come from greater acceptance of banks' converting real estate debt into equity, the report says.

Continued government efforts aimed at efficiently disposing of real estate held by the Resolution Trust Company will also have a positive effect on the real estate market, the report says, citing recent moves by the RTC to provide financing to buyers as an example of beneficial government action.

But ultimately, the report concludes, rejuvenation of healthy demand is the long-term solution to real estate's ills.

"Fortunately, policies need not be targeted specifically to the real estate industry to address this crucial factor," said Manolis. "Indeed, any actions and events that favor economic growth and capital formation will drive up demand because real estate remains a primary component in the production of goods and services."