Real estate growth strategization is key for '97.

As we enter 1997 and the New Year begins, optimism prevails in the real estate market. The 1996 statistics compiled by CB Commercial New York Investment Properties Group that track New York City office, hotel and residential deals above $8 million, indicate sales of $5.211 billion. Domestic and foreign investors are bullish on New York City real estate. Foreign purchasers acquired nearly $2.358 billion of property and the foreign investor continues to play a large part in New York City deals.

Some 1996 "foreign" sales worth mentioning are the acquisition by the Corzia family of Mexico of 500 Fifth Avenue for $94 million; The Four Seasons Hotel, purchased by the Lai Sun Group for $190 million; and 589 Fifth Avenue by Bayerische, Beamte Verschicherung in the amount of $33.3 million. All sales indicate that 1997 will continue to witness the foreign investor and overseas institution making bids and acquiring properties in all real estate asset categories.

The buzz words for 1997 are "growth strategies." The positive outlook on the economy and New York City real estate has set the momentum for growth. "Re-engineering," "workouts" and "re-structuring" are words of the past. A vibrant macro economy has revived property values across office, residential, hotel and industrial properties, not to mention the equity market that seems to reach new stock trading heights, as well as the corporate price earning ratios that grew even further.

Perhaps the consistent question asked by all acquirers is: How is the "value" of the real estate being analyzed? Today, pricing is derived from current yield on net operating income, and not the purchasing of "futures." Growth value of a property or a portfolio is still important to the buyer, but the future expectation is being discounted to represent realistic values.

Long-term growth strategies and future expectations of real estate continue to be of paramount importance to life insurance companies, pension funds, real estate investment trusts and other institutional investors. The institutional investor, according to Torto Wheaton Research, an economic forecasting company, owns nearly $1.35 trillion worth of real estate. The U.S. real estate market, conversely, has a value of $3.15 trillion worth of real estate. It is because this segment of the market holds so much real estate value that it is prudent to examine its trends. Further distilled, debt represents $933 billion worth of the institutional real estate ownership, with the remainder being equity.

Worthy of note is the institutional investors and individuals utilizing the public markets to assist in assembling a real estate portfolio that are now becoming increasingly involved in New York City real estate. We saw that several hotels, including the Mayfair, were acquired by Colony Capital; Leon Black shifted some of his focus from acquiring a large portfolio of companies to hand-picking real estate portfolios. Perhaps the Olympia & York debt acquisition was one of his more pronounced real estate excursions; and lately the Blackstone Group's acquisition of World Wide Plaza and 527 Madison Avenue are yet other examples.

Vornado, Trizec, Reckson, Cali and soon Mendik are part of a cadre of bidders hunting for properties for their portfolios, coming to the market armed with the backing of the public market's power and stability. As one officer of a REIT recently commented, "I can raise $50 million in 49 minutes in the public markets and close on a deal in 30 days; what traditional buyer can compete with me?"

The institutional investor, in examining its asset allocation models in 1997, seeks to implement a growth strategy. In executing this strategy, several options are considered, including the option to sell portfolio real estate assets for shares in a publicly traded entity. Prudential Insurance, New York Life and Metropolitan Life, amongst others, continue to dispose of real estate assets.

1997 should see an increased upsurge of foreign and domestic institutional sellers. Institutional investors are swapping real estate for shares of REITs. Compared to other sources of financing, the efficiency of the public markets create liquidity and a lower cost of debt. I believe these are the engines directing this trend. Thirteen percent of all commercial real estate will be securitized by the end of 1997. This increase, from single digits to current double digits, is worthy of attention.