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As prices fall, investor caution advised.

There have been seldom been more bargains available in real estate than in today's depressed market. Nonetheless, the savvy investor will proceed with caution.

One reason to be wary is that more attractive opportunities soon should be available, but many institutional sellers who already have written down their property are holding on to them, not believing the market is still in a decline. These sellers continue to believe that they can turn their properties around rather than put them in the hands of entrepreneurs.

There are a couple of reasons for this. Often, owners fear that lowering prices even further would result in unacceptable losses. In addition, because interest rates are low, returns on real estate needn't be too high to compete with other options available to institutional owners.

In spite of this, in the right circumstances, profitable transactions are still being arranged.

We recently purchased the 21-story, 400,000-square-foot U.S. Home Building in Houston. The area was severely depressed from 1982 to 1988. It then had a startling recovery through 1991, but is relatively flat now. However, recovery is never a straight line. It is rather a series of steps, and Houston will continue to climb them.

Having criteria is another way of showing discretion when purchasing properties. At Commercial Developments International/ East, Inc. (CDI), we cite four important standards for buying:

* A minimum size of 200,000 to 250,000 square feet. A critical mass is essential for CDI; it has to be large enough for purchase to make sense

* Upside potential. Though cash flow is important, its's not vital to us at the outset. We're in this for the value appreciation, not for instant gratification. CDI is more interested in how a market will recover over two to three years, rather than what's going on this very moment.

* The market area. We're very niche-oriented. We're interested only in certain cities that are stable or recovering such as Houston, Washington and Denver -- and only certain submarkets within those cities. We especially like Houston; it's not only the second largest port and fourth largest city in the United States, but it has diversified far beyond oil.

* Quality, not trophism. We want to buy good property with great potential - rather than, say, the more obvious signature buildings in town.

Careful purchasing of key buildings in areas that are showing signs of recovery, can position investors to benefit from a real estate come-back in the future. Be prudent.
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Title Annotation:Review and Forecast, Section I; real estate industry
Author:Kessler, Alan T.
Publication:Real Estate Weekly
Date:Jun 24, 1992
Previous Article:RE recovery: it's all in the bank.
Next Article:Financing: dead or alive?

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