The Fed, Congress to determine industry's recovery.Job creation, economic growth and interest rate volatility in 1995 will have a tremendous impact on the rate of continued recovery for the nation's real estate industry, according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the National Real Estate Practice of KPMG KPMG Klynveld Peat Marwick Goerdeler (accounting firm)
KPMG Kaiser Permanente Medical Group
KPMG Keiner Prüft Mehr Genau (German)
KPMG Kommen Prüfen Meckern Gehen Peat Marwick LLP LLP - Lower Layer Protocol .
While the industry has shown marked improvement in nearly all sectors of the market in 1994 and continues to do so in the first months of 1995, several upticks in interest rates and the uncertainty of the country's new Republican legislative agenda, have combined to send out a potential warning signal as we head into 1995.
"There is no doubt that the industry has begun to come into balance after several years of instability," said Roger Johnson Roger Johnson can refer to:
"However, going forward, the chance of a full-blown recovery lies greatly in the hands of our new Congress and the Fed's actions on interest rates and other market issues," Johnson continued. "The rules for a new game are still being written and, at the least, the industry must proceed with caution if it is to continue its favorable recovery."
"Job creation remains the key to the continued recovery of the real estate industry," added Johnson. "There is no getting around the need for a return to fundamentals if the industry is to ever emerge from the '80s catastrophe."
Infrastructure a Key
Johnson also noted that the chronic need to rebuild infrastructure will be an issue for years, as it affects a city's ability to attract people and jobs. Cities that can support a commuter transit system, an integrated ground and air transportation web and increased stress on utilities - while balancing public resistance to more municipal bond financings - will be able to attract business and sustain job growth.
Johnson foresees the southeast and southwest regions of the country being the big winners, experiencing an increase in job growth and economic development, because of the population growth predicted in these areas for 1995.
Implications of a Republican Congress
The Republican Party's "Contract with America In the historic 1994 midterm elections, Republicans won a majority in Congress for the first time in forty years, partly on the appeal of a platform called the Contract with America. Put forward by House Republicans, this sweeping ten-point plan promised to reshape government. ," if passed it its current form, could benefit the real estate industry, according to KPMG Peat Marwick LLP's National Real Estate Tax Practice. However, the path to enactment is not without obstacles, the Practice warns.
"Changes could be made which would result in less favorable or even down-right adverse tax results for the real estate industry," said Philip J. Wiesner, national director of Real Estate Tax Services.
The Contract's "Job Creation and Wage Enhancement Act" contains two key provisions that could affect the real estate industry - "Capital Gains Reform" and "Neutral Cost Recovery."
The proposed "Capital Gains Reform" would provide individuals and corporations with a 50 percent deduction for capital gains and an inflation adjustment to the basis of capital assets capital assets n. equipment, property, and funds owned by a business. (See: capital, capital account) . Also provided would be a deduction for any capital loss incurred on the sale or exchange of a principal residence.
"If the past is any indicator, one key battleground will be the amount of tax depreciation claimed with respect to real estate assets that may be subject to 'recapture' as ordinary income and, therefore, not benefit from capital gains treatment," Wiesner said.
"Neutral Cost Recovery," the second key provision impacting the real estate industry, would introduce a new depreciation system for all assets, including real estate. According to Wiesner, the objective of this provision is to make the present value of tax depreciation the same as if the property were immediately written off for tax purposes in the year of its acquisition.
"It's safe to say that the industry will never again be allowed the rapid write-offs granted in 1981, when the depreciable depreciable
Of, relating to, or being a long-term tangible asset that is subject to depreciation. life of real estate was 15 years. The tax depreciable life of most real estate is currently 39 years and resistance can be anticipated to any attempt to substantially shorter, it," Wiesner said.
"The Republicans are promising a somewhat conflicting agenda of fewer taxes and budget reduction, so the big question remains where the cuts will take place," Wiesner said. "Because there appear to be areas that are off-limits, such as Social Security, Medicaid and Medicare, the Republican-controlled Congress may be tempted to reduce some current tax deductions Tax deduction
An expense that a taxpayer is allowed to deduct from taxable income.
See deduction. in order to reduce the extent of the budget cuts."
"If Congress were to be so tempted, those with an interest in real estate should remember that deductions for home mortgage interest and for real estate taxes are two of the largest so-called tax expenditures," Wiesner said. "Thus, the real estate industry should be wary when Congress is looking for Looking for
In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. revenue to offset its proposed tax cuts or if the push for flat tax truly gains momentum."
Interest Rate volatility Dampens Real Estate Capital Markets Activity
Banks, thrifts and insurance companies withdrew from the real estate markets in the late 1980s and early 1990s. Owners and developers increasingly looked to Wall Street as another, more stable source of capital. Securitization Securitization
The process of creating a financial instrument by combining other financial assets and then marketing them to investors.
Mortgage backed securities are a perfect example of securitization.
May also be spelled as "securitisation. hit an all time high of $20 billion last year and it continues to mature as investors become more familiar with the product.
After seven recent interest rate increases and the return in 1994 of traditional lenders who revamped their underwriting procedures, the flow of real estate into the capital markets has cooled. "That is especially true as it relates to the growth of conduits," said Charles R. Walker, a partner in KPMG's Real Estate Capital Strategies Group.
"I'll cite two reasons: When you add the cost of securitization to the trading levels of commercial mortgage-backed securities Commercial mortgage-backed securities (CMBS) are a type of bond commonly issued in American security markets. They are a type of Mortgage-backed security which are backed by mortgages on commercial rather than residential real estate. , the capital markets alternative may not be able to compete with the returning traditional portfolio lenders - the spreads just may not work," said Walker. "Secondly, recent isolated defaults in securities, such as the Ginsberg multi-family transaction, have toned down investors' enthusiasm."
"Better, more complete information regarding the ongoing performance of the underlying mortgages - the collateral for the securities - is vital," he said. "Investors will demand it. And the issues that cannot, or will not, provide such information will suffer where it hurts most - in their trading prices."
Despite slowed securitization volume and activity in recent months, accessing the capital markets through securitization is here to stay, reports the practice, and will continue to be a major option in the mix of real estate investments because favorable investor returns drive it.
Walker concluded that because commercial mortgage-backed securities hold the largest potential for infusing capital into the real estate industry, "More long-term securitization - over time - will be used increasingly by traditional lenders as an additional avenue to help their loan portfolios become more fluid, more agile in volatile market conditions."
Return of the Traditional Lender
For the most part, the end of 1994 marked the return of traditional sources of real estate financing for all segments of the market. Capital is flowing and banks, insurance companies and pension funds are investing or lending in the real estate market once again, albeit much more conservatively, according to KPMG.
"Far-sighted far·sight·ed or far-sight·ed
1. Able to see distant objects better than objects at close range; hyperopic.
2. Capable of seeing to a great distance.
3. insurance company lenders have returned to the market and large pension funds have come back into the direct real estate investment business competing for ownership," said Paul Reilly Paul Reilly (born May 10 1976 in Huddersfield, England) is a rugby league player who plays for the Huddersfield Giants. He plays in the full back position.
He was born and bred in Huddersfield and has played for the club for 10 years. , national partner-in-charge of Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. Consulting. "As we move into 1995, we can expect these investors, who were on the sidelines On the sidelines
An investor who decides not to invest due to market uncertainty.
on the sidelines
Of or relating to investors who, having assessed the market, have decided to avoid committing their funds. last year, to increase their role in the $3 trillion real estate market, now viewed as an inflation hedge Inflation hedge
Investments designed to hedge against inflation and the loss of purchasing power associated with it.
An investment with a value directly related to the level of general price changes. with double-digit returns expected and little downside risk Downside Risk
An estimation of a security's potential to suffer a decline in price if the market conditions turn bad.
You can think of this as an estimate of the amount that you could lose on a stock or other investment. ."
In search of higher yield and diversification, banks, insurance companies and pension funds will grow more active in the real estate industry, which is currently showing potential for superior returns over the stock and bond markets, a trend that is likely to continue, Reilly predicts.
Perilous REIT REIT
See: Real Estate Investment Trust
See real estate investment trust (REIT). Market Filled With Opportunity
"For the past three years, REITs, or real estate investment trusts, have been the headline maker, the market darling," said Johnson. "But looking ahead, the REIT market is on the verge On the Verge (or The Geography of Yearning) is a play written by Eric Overmyer. It makes extensive use of esoteric language and pop culture references from the late nineteenth century to 1955. of a substantial shakeout. Interest rate volatility combined with the bidding up Bidding up
Moving the bid price higher. of prices and market saturation In economics, "market saturation" is a term used to describe a situation in which a product has become diffused (distributed) within a market; the actual level of saturation can depend on consumer purchasing power; as well as competition, prices, and technology. over the past few months has resulted in both an increasing number of REIT IPOs of less than stellar quality, as well as a significant decline in activity."
As a result, the market is punishing the pricing on those REITs rocked by yields that fail to keep pace with returns from other, less risky, less interest rate-sensitive securities, he added.
"The thing to watch for in 1995 will be the REITs' ability to meet the dividend payout projected at the time of the initial offering," said Johnson. "If they fail, the market will punish the share prices severely and it will trigger a major consolidation movement and a multitude of takeovers in the REIT market, as we have already witnessed on a very small scale."
Multi-family REITs, last year's hottest ticket, have reduced their appetite for acquisitions because of the increased cost of debt and equity capital. One arena to watch for initial public offerings, though, is the industrial segment, reports the practice.
Opportunity for Foreign Investment Continues
While foreign investors are skittish skit·tish
1. Moving quickly and lightly; lively.
2. Restlessly active or nervous; restive.
3. Undependably variable; mercurial or fickle.
4. Shy; bashful. about U.S. real estate in the short-term, partly because of volatile interest rates, the practice predicts the industry wilt continue to become a more global enterprise, with both U.S companies investing abroad and foreign ventures coming into the U.S.
"Foreign sites such as Mexico, China, the Pacific Rim Pacific Rim, term used to describe the nations bordering the Pacific Ocean and the island countries situated in it. In the post–World War II era, the Pacific Rim has become an increasingly important and interconnected economic region. , Russia and Eastern Europe Eastern Europe
The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991. continue to offer major real estate investment opportunities," said Paul Garity, national director of real estate consulting. "As globalization globalization
Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation continues, these areas need hotels, offices and apartments that meet Western standards in order to compete. The challenge for U.S. developers is to find locally-based partners to navigate the politics and international lenders for financing," said Garity.
Also, there may be some opportunity in Europe for vulture funds to buy non-performing real estate loans from foreign equivalents of the RTC See real time clock. , as is currently happening in Sweden, noted Garity.
According to the practice, foreign investment in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. is expected to increase, first from Europeans seeking higher returns, and then from Asian flight capital. One growing area of opportunity for foreigners is to purchase REIT shares to obtain higher yields without sacrificing liquidity as they have in the past with direct investments.
1995 Outlook for Construction
"Contractors are optimistic op·ti·mist
1. One who usually expects a favorable outcome.
2. A believer in philosophical optimism.
op about the economic prospects for 1995, as evidenced by their projections for continued growth in business volume," said John Callan, national director of KPMG Peat Marwick's Construction Practice.
According to a survey of financial managers conducted by KPMG Peat Marwick for the Construction Financial Management Association, nearly two-thirds (64 percent) of those surveyed expect an increase in next year's volume, compared to 56 percent the previous year and 47 percent in 1992. Single family/residential and industrial/nonresidential segments are the most optimistic, with 73 percent and 72 percent, respectively, expected in increased volume in 1995.
In addition, more than three-quarters (78 percent) of those surveyed indicated their company's availability of credit has improved over the past 12 months, a signal that the economy is moving out of recession, according to the practice.
"The availability of credit is a good signal that the economy is recovering, which should translate into more activity for the industry," Callan predicts. "The coming year should be a good one for the construction industry if the projections of those surveyed are any indication."
While we will most likely see construction in the residential and the economy segment of the hospitality industry, the picture for construction is not all roses. Opportunities for development in the office market remain grim, according to the practice. "Speculative office development is unlikely in most markets since the country has about a ten year supply of office space available," said Garity.
"If there are any office development opportunities to be had, they will be found by following tenants who may venture into smaller cities that offer low-cost housing and special incentives," Garity said.
Strengthening Office Market Not Enough to Calm Investor Apprehension
Rising rents, increasing occupancies and the reduction of concessions in almost all office markets across the country has not been enough to put investors' apprehensions to rest, according to the practice.
"Overall office market vacancies will continue to decrease to the 15 to 17 percent level, down from 18 to 20 percent in many markets," Johnson said. "But values are lagging behind due to a lack of investor confidence and fears of interest rate increases." He also clarified that few of the five million jobs created over the past two years have been for users of Class A office space.
"Additionally, investors are still skittish due to uncertainty over continued corporate downsizing (1) Converting mainframe and mini-based systems to client/server LANs.
(2) To reduce equipment and associated costs by switching to a less-expensive system.
(jargon) downsizing , telecommuting telecommuting, an arrangement by which people work at home using a computer and telephone, transmitting work material to a business office by means of a modem and telephone lines; it is also known as telework. and the sharing of office space, as well as general uncertainty about the strength and duration of the overall recovery," he said. "The bottom line is companies are learning to do more with less, decreasing the demand for commercial office space, particularly in central business districts."
However, according to the practice, it appears that the suburban office market is recovering more quickly than the downtown space in most cities. "Corporate America loves the convenience and quality of the suburban market," said Garity.
The practice points out that some cities are faring better that others in the office market recovery. For example, downtown Los Angeles Downtown Los Angeles is the central business district of Los Angeles, California, located close to the geographic center of the metropolitan area. The sprawling, multi-centered megacity is such that its downtown core is often considered just another district like Hollywood or is so bad it can only go up, while cities such as Washington D.C. and San Francisco San Francisco (săn frănsĭs`kō), city (1990 pop. 723,959), coextensive with San Francisco co., W Calif., on the tip of a peninsula between the Pacific Ocean and San Francisco Bay, which are connected by the strait known as the Golden lave done better because of continued job growth and restrictions on new construction.
"Despite low property values in 1995, we'll witness the sale of more troubled office buildings, which will finally be sold by insurance companies and Japanese banks who had foreclosed and waited for a fast and strong office recovery that just did not happen," Garity said.
Residential Markets Post Record Year
The practice reports that 1994 was a record year for the single family housing market. "Historically low interest rites at the beginning of last year and improved employment figures fueled the demand in the first-time home buying market as it put pressure on people to get out of apartments and multi-family dwellings," maid Garity. "Irresistibly low interest rates also made significant new construction possible for current homeowners looking to trade up.
"With every point that interest rates increase, 500,000 individuals lose the ability to afford a house," maid Garity. "Therefore, if rates stabilize at current levels there is an excellent chance that we will continue to see exceptional activity, including additional new construction in the housing market. However, if rates continue to climb, housing staffs are likely to level off for a while and then slow way down."
The practice also reports that apartment values lave now peaked and further significant appreciation in this segment is not expected in the near future.
"With a strong increase in earnings, occupancies and room rates in most major U.S. markets in 1994, the hospitality and lodging industry continues to show signs of substantially improved performance at all price points and at a pace much faster than was predicted," said Frank Nardozza, national hospitality industry director. "Hotel values increased 18 percent in 1994."
"Although the hospitality industry may be the fastest segment to climb out of real estate disaster, let's not Let's Not is a science fiction short story by Isaac Asimov. It was first published in Boston University Graduate Journal in December 1954. It was written for no payment as a favour to the journal, and later appeared in the collection Buy Jupiter. forget that it was also the hardest hit," said Nardozza.
"The window of opportunity for 'bargain basement' buying is expected to close in 1995 due to escalating hotel values and a robust hotel deal market," warns Nardozza.
"Faced with rising interest rates and climbing hotel values due to improved earnings and a downward adjustment on capitalization rates, investors are operating within a seller's market," he added.
If interest rates and hotel values continue to heat up, those investors with access to Wall Street funding, such as large real estate investment funds Noun 1. investment funds - money that is invested with an expectation of profit
assets - anything of material value or usefulness that is owned by a person or company and hotel companies, will continue to dominate the hotel property acquisition market in 1995. The practice also points out that investors from the Middle East and Asia continue to actively pursue institutional-grade hotels and hotel portfolios throughout the U.S., with luxury properties a target in key U.S. cities such as Chicago, New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of and Los Angeles Los Angeles (lôs ăn`jələs, lŏs, ăn`jəlēz'), city (1990 pop. 3,485,398), seat of Los Angeles co., S Calif.; inc. 1850. .
"Increased trade and travel as a result of NAFTA NAFTA
in full North American Free Trade Agreement
Trade pact signed by Canada, the U.S., and Mexico in 1992, which took effect in 1994. Inspired by the success of the European Community in reducing trade barriers among its members, NAFTA created the world's and GATT See General Agreement on Tariffs and Trade.
See General Agreement on Tariffs and Trade (GATT). will also spur greater lodging demand and investment opportunities for international hotel companies - and this may be only the beginning," said Nardozza. With a free trade zone for the Americas looming on the horizon, opportunities will consequently continue to expand, he noted.
The Summit of the Americas The Summit of the Americas is the name for one of a sequence of summits bringing together the countries of the Americas for discussion of a variety of issues. These encounters are organized by a number of multilateral bodies led by the Organization of American States. , held in Miami in December, set the framework for the establishment of a $13 trillion trading block for the Americas, which would far outweigh the European Community European Community: see European Union.
European Community (EC)
Organization formed in 1967 with the merger of the European Economic Community, European Coal and Steel Community, and European Atomic Energy Community. in size and clout. "Savvy investors should begin taking steps now to expend ex·pend
tr.v. ex·pend·ed, ex·pend·ing, ex·pends
1. To lay out; spend: expending tax revenues on government operations. See Synonyms at spend.
2. market distribution throughout the Americas," Nardozza said.
"Due to increasing interest rate pressure and a full plate of transactions committed at year-end 1994 by institutional investors, who essentially make the market for hotel REIT offerings, the flood of new offerings was cut book to nothing but a trickle," added Nardozza. "It is likely that several of the postponed issues will come to market in early 1995, but at slightly higher yields to meet tougher investor return requirements."
"Banks, insurance companies and credit companies are likely to re-emerge as primary sources of hotel financing; however, be forewarned because underwriting criteria will be significantly tougher than that of the 1980s," maid Reilly.
Unfortunately, mortgage conduits, believed to be one of the hottest financing products in the mortgage-backed securities Mortgage-backed securities (MSBs)
Securities backed by a pool of mortgage loans. market at one time, have yet to take hold as a major new financing source for hospitality ventures. With interest rates 300 to 500 basis points above mid-term T-bill rates, conduits are too expensive for most borrowers, he explained.
"Unless interest rates decline in 1995, or the programs are redesigned to be more affordable to borrowers, the practice does not expect conduits to take hold this year either." Reilly warned.