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Boardroom view.

When will normal times return to the commercial property origination market? And what are normal times, anyway? Putting the definitional questions aside, we decided to assume that people in the industry would know what we meant if we simply asked them when they thought the U.S. office sector's lending activity would return to "normal."

Merrill Yavinsky, CMB, executive vice president, Walker & Dunlop, Inc., Washington, D.C., responded to the challenge and said he thought it would take from three to four years for origination activity in the office sector to return to normal. Walker & Dunlop's primary markets are Maryland, Virginia, District of Columbia and Delaware. Yavinsky says two major factors will complicate the origination rebound in the office sector and delay its recovery. He says that staff reductions inside many companies and consolidations of firms will combine to shrink the office space needs of employers. He added that convenience to transportation will be a factor in office space demand. Easy subway access locations will fill up if they maintain reasonable rental rates, he said, but the further you get away "the tougher it's going to be."

Yavinsky added that certain office space has been stung by a negative perception among lenders that appears hard to shake. "I don't think lenders will get over this bias against suburban office space." He also said that most life companies have office building exposure in excess of what is now considered ideal. "Most life companies have portfolios with office exposure in excess of 35 percent, whereas the ideal is closer to from 25 to 30 percent."

Yavinsky says the preferred product type has shifted now to apartments and industrial space. He says the job reductions and consolidations have combined to make the overbuilt office sector a higher risk sector. The retail lending sector has also been hurt by consumers keeping tighter grips on their wallets during this recession. The retail tenant is suffering as a result. He said the "highest priority today seems to be multifamily, particularly in the moderate. apartment category as opposed to luxury apartments, which are vulnerable to a shift be tenants to homeownership." Another favored category among life company lenders is warehouse distribution space, but not "flex space," says Yavinsky.

David W. Steinman, CMB, vice president, Mellon Bank, NA, Pittsburgh, sees the return to normal origination times in general as "probably four years away." He explains, "On a nationwide basis, I would expect there will be very little need for office building originations until at least 1995. I'm talking about office buildings with 100,000 square feet and more and I'm excluding owner-operated buildings. In general, [normal origination activity] is probably four years away. There are certain pockets of exception to that statement, but they are probably too numerous to delineate. But, it probably will be that long before there is going to be a real need."

In terms of the inventory of office space already built, Steinman said there are some places where there is already a 10-year supply of space. He adds, "Im being awfully nice to say by 1995."

He says there is one major variable that could alter his expectations for the office origination turnaround--that is overall U.S. economic growth. Steinman says if there is a major upturn in the U.S. economy that brings a sustained period of strong growth, then the job growth spurt produced by that could quicken the origination rebound. He points to the Texas example as an indicator of the time cycle the turnaround will follow. Steinman notes that the Texas bust is going on being 10 years behind us. He says it is roughly eight years ago that the Lone Star state hit economic rock bottom. He recalls, "When that started, we all said there was from 7 to 10 years of vacant office space available. Texas is a prime example of how long it takes to come out of an overbuilt situation coupled with an economic disaster, such as the petroleum industry recession."

We asked about which geographic markets were most likely to absorb their inventory of vacant office space most quickly. Steinman said it was probably the upper Midwest from Pittsburgh to Chicago. "I think Columbus, Cleveland, Cincinnati and those cities will probably come out as fast as anyone's going to create new jobs."

As a guiding principle, Steinman said, "I think those areas that have the ability to create new jobs will recover faster in our country. Texas is doing a decent job in creating new employment, but New York has a terrible uphill battle to create new jobs."

California also holds some surprises for some market pundits who keep expecting this market to hit the wall in terms of real estate. But Steinman says while everybody outside the state says they are ready goes under. He says values are down from their peaks, but the key is that Californa is probably the only state that is a net new-job producer.

As far as product niches for the 1990s, Steinman offers up two: housing for the elderly and apartments. He says it might take some incentives to draw lenders to those products. But he raises the red flag when it comes to altering tax incentives broadly for real estate. "I'm hopeful Congress will go very slowly on such changes. The tax laws prior to 1986 were probably the major reasons that we have the tremendous overbuilding we have today."

Gary Chaplin, investment vice president, The Manufacturers Life Insurance Company, Toronto, Ontario, declined to venture a guess as to how far away an origination rebound might be. His comment was only that "I judt don't expect it will return for some time."

In terms of favored product types, Chaplin sees warehousing space as among the strongest category of products currently. Chaplin says this sector remains relatively strong because it escaped the heavy overbuilding of other types of space, but he cautions that it can become overbuilt quickly because actual construction time is minimal.

In terms of the geographic markets that could absorb inventories of vacant office space faster than others, Chaplin says, "I fell that West Coast cities might absorb [their inventories] faster. Certainly the Pacific Northwest cities seem to be in better shape." But overall, he added, "It's bad."

We asked the experts how many jobs in the commercial real estate finance sector they though had been lost during the last year and a half of turmoil in their industry. While Chaplin cautioned it was just a guess, he estimated that around 25 percent of the jobs had been lost during that time frame. On the same question, Steinman said, "I have no way of coming to an exact or near-exact number, but I know that a substantial part of the production side of the income property business is now in the workout and disposition side of income property assets."
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Title Annotation:mortgage banking industry leaders' views on when the commercial real estate business will return to normal
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Jul 1, 1991
Previous Article:Just the facts.
Next Article:The view from here.

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