RE recovery means harsh measures.

RE recovery means harsh measures

Got an interest in farm land? If you do, that's where you'll find the one bright spot in 1992, says Emerging Trends in Real Estate 1992, the annual survey underwritten by Equitable Real Estate Investment Management, Inc. Farm values are climbing and competition to rent is rising, making it the one sector with a zero percent vacancy rate.

For all other investment areas, the survey recommends further conservatism by lenders and developers and no new space.

On a city-by-city, basis, the report found New York and Boston, which lead overwhelmingly in the 80's, are now trailing at the end. Conducted by the Real Estate Research Corp., the survey participants recommend less leverage, more realism and no new space. And, they say, until the remedy takes effect, the worst of the pain is not over.

The report urges including: more realistic investor expectations, no new speculative space, significant deleveraging of assets, and lowered valuations virtually across the board. Even with these steps, the interviewees conceded that during 1992 things will get worse before they get better.

Among the report's significant findings: *41 percent of the industry experts see prices stagnating in 1992, 43 percent see them decreasing and 16 percent see them decreasing significantly. None see price increases. With the downward pressure on prices, 43 percent voiced higher yield expectations *Not surprisingly, 82 percent said 1992 would be a better time to buy than to sell. Only six percent would rather be on the sell side *Even at the apex of the quality pyramid, prices will be down, although less so for the top properties *Respondents see upward pressure on values for apartment properties in 1992, industrials and regional malls in 1993 and office properties at mid-decade. For land and hotels, they see no value increases until 1996 and 1997, respectively.

Although Emerging Trends emphasizes stark realities, the report also states that, "while no one is doing well, not everyone is going out of business. Pemion fund portfolios -conservatively assembled, professionally managed -- will emerge intact from the restructuring." And despite deeply troubled office markets, it predicts that "Regional shopping centers, certain industrial properties -- to name two -- will fare better than other asset classes."

Emerging Trends participants agree that the condition currently facing the real estate industry are unprecedented. As opposed to past cyclical downturn, the comensus is that this is a fundamental, structural realignment of people, money and product that will take until mid-decade to sort out.

According to George R. Puskar, chairman and CEP of Equitable Real Estate Investment Management, Inc., which underwrites the report prepared by Real Estate Research Corp.: "Even factoring in the extremely difficult times we are going through now, over the long term high-quality, well-located commercial real estate will continue to provide good income streams and steadily increase in value."

The following are key points along Emerging Trends' roadmap to recovery: *Expectations: Investors must set realistic current performance goals and reconcile them with the inflated and unmet expectations of the 1980's. Longer-term standards for both debt and equity must be re-calibrated. *Supply: No new space! The current oversupply will yield to acceptable supply/demand balance slowly over the next few years, but only if construction virtually stops. And the market must absorb the new space currently in the pipeline that will come on stream through 1993. *Deleveraging: Real estate must be significantly deleveraged, which is a gentler way of saying writedowns and foreclosures. *Re-evaluation: Values are still overstated in almost every investment and loan portfolio. Values will drop because real income is down; investors and permanent lenders now place a reasonable risk premium on their money.

"If the industry can stick to this admittedly unpleasant course, we think 1992 will be a bottoming-out year," commented James J. Gorman, executive vice president of Real Estate Research Corporation. "But only presuming no additional development."

Among the prospects over the short-term -- 12 to 18 months -- that the report predicts are: *Transactions: The market's gridlock will unsnarl as sellers lower their prices and a few buyers step up to the plate. But it will be gradual. *Capital: Public pension funds, wealthy individuals and bottom fishers will be among the select group of active capital players. Offshore money will be much restrained. *Values: Valuations and valuation methodology will be more in the news. There will be no consistent pattern of value increases until 1993. However, the report adds that pension fund values are accurately stated for the most part. Those of banks, on the other hand, are not. *Property Types: Apartments and single-family homes have the best short-term prospects, while regional malls and industrials still rank high. But both suburban and downtown office buildings continue to lag, and hotels are still off limits.

Market Rankings

Even the nation's "best" real estate markets are rated as having only mediocre prospects for 1992, according to the report, released. The outlook for most cities is weak. While Seattle remained at the top of the list, its ranking, on a scale of one to 10 (ten being "great"), slipped from 6.4 to 5.5.

The once moribund Dallas, Denver and Phoenix markets are the only ones that registered any increase in the survey. West Coast cities, with the notable exception of Los Angeles, continue to hold their own in the rankings. Two of the East Coast's stars of the 1980's, New York and Boston, plunged even further in the survey and now trail the list.

The Emerging Trends rankings show the speed with which cities can gain or lose favor in the nationwide survey. For example, Dallas ranked 12th on the list in 1990 but is second in 1992. Three cities at the head of the pack over the past few years -- Los Angeles, Washington and Chicago -- have slipped back to the middle.

Specific comments on market were: *The Texas recovery is well documented but still fragile. Houston is in as relatively good shape as Dalla, but doesn't get the positive press *The rebounds in Denver and Phoenix are also significant, but still warrant caution. New development stock in the pipelines in Chicago and Los Angeles portend worsening conditions there *The Washington, D.C. market should recover first *Regionally, the South and West continue to dominate, and their strength is backed up be economic and demographic forecasts

Agricultural

The report does, however, urges caution in the agricultural market. The amount of available agricultural investments are limited, and a slow-and-steady approach to the asset class must be maintained to avoid an overabundance of capital that still affects the commercial markets.

"We're seeing increasing interest from institutional investors in farmland investments," said Kenneth Binkley, senior vice president of Equitable Agri-Business. "Now is clearly an opportune time for prudent moves into this asset class, both mortgages and real estate equity."

The agricultural segment of Emerging Trends, based on interviews with key agri-business leaders, says that because of positive underlying fundamentals and attractive long-term return on farmland investments will gain an expanding share of pemion fund and other institutional capital.

RERC is a national real estate advisory, consulting, and valuation firm specializing in institutional investment analysis, portfolio and property evaluation, development feasibility, and industry research. In addition to its headquarters office in Chicago, RERC has offices in New York San Francisco, and Washington, D.C.