Real estate buying opportunities could come from stock market woes.

REITs are feeling new pressure due to the recent downturn in the stock market. As a result, a window exists for private entrepreneurs to purchase quality real estate at more realistic prices. This opportunity is best understood in the context of recent conditions in the real estate market.

During the last 12 to 18 months, well-occupied properties producing strong cashflow have been in high demand by REITs looking to expand. By taking advantage of their access to public capital with lower current yield expectations than those of most private real estate investors, highly capitalized buyers have "bid up" the prices for such properties, effectively "pricing-out" private entrepreneurs.

At the same time, the rapid pace of transactions has heightened the expectations of sellers to achieve prices that have been impossible since the mid-1980's. The elimination of the New York State Real Property Transfer Gains Tax ("Cuomo Tax"), taken together with the reduction in Federal Income Tax rates on capital gains, have impelled many previously reluctant sellers to rush their properties to market. Since some of the institutional buyers are temporarily out of the market, well-financed entrepreneurs who have private sources of capital and well-capitalized offshore buyers, should now be able to acquire quality properties at more competitive prices.

By utilizing a moderate amount of conventional financing at current rates, for example, interest rates at 7.25 percent plus .75 percent for loan amortization (principal repayments), property purchased at an 8.5 percent to 9.5 percent "capitalization rate" (or all-cash yield) can produce a 10 percent to 11 percent yield on invested equity. Due to the tax benefits of depreciation, this yield compares very favorably - on an after-tax basis - with most alternative forms of investments, even without considering issues of capital appreciation. As a consequence of the added benefits of real estate as a hedge against inflation, making investments during this period of strong market dynamics can produce substantial returns.

Throughout most regions of the United States, commercial property has recovered strongly from the recession of the late 1980's and early 1990's. More specifically, the absence of new construction in New York City since 1986, combined with the continued expansion of tenants for the last three years, has shifted the supply and demand curves, so that occupancy levels have broken 95 percent in Midtown Manhattan and 90 percent in Lower Manhattan (Class A product). This has resulted in "spikes" in effective rental rates of as much as 25 percent annually for the last 12 to 24 months. Since no speculative development in New York City is currently in progress, these increases in net effective rent should continue for the foreseeable future.

While the local underlying supply and demand trends for office space should last for some time, this recent "correction" in real estate pricing is likely to be temporary. As soon as the stock market settles down, institutional buyers will drive prices back up, and the properties representing attractive buying opportunities will again disappear.