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Commercial real estate.

The business of commercial real estate continues to work its way through the challenges created by the Tax Reform Act of 1986.

Today investors are primarily in two categories; owner-occupied or investment companies that are trying to seize the opportunities in this real estate cycle where the spread between cost of funds and anticipated returns are at an all-time high.

The first category includes companies looking for an efficient way to handle their occupancy needs while receiving a reasonably good return on their investment. The second category includes Real Estate Investment Trusts, Joint Venture Funds and a few individual investors.

Real Estate Investment Trusts, or REITS, can now buy properties with good credit tenant occupancy at capitalization rates around 11 percent with cost of funds remaining near 4 percent. This 7 percent spread is not necessarily available for the typical real estate investor, but such investments will provide a stimulus for other investment funds.

The investment climate for older, grade B and C properties continues to be depressed with a "fire sale" mentality. Increased governmental regulations related to removal of asbestos, the Americans with Disabilities Act and environmental laws, along with the dumping of real estate by the Federal Depositor Insurance Corporation and the Resolution Trust Corporation, have created an extremely difficult environment for some properties that might otherwise continue to have a useful economic life.

Occupancy rates in central Arkansas have steadily improved in the Class A office sector. Virtually no speculative office development is under construction, however, and little is projected for 1993 and 1994.

The retail space market for strip centers is in oversupply due to the failure of many locally owned retail businesses and contracts held with regional and national retailers. These large retailers will provide intense competition as they practice their category "killing" strategy.

In spite of the challenges associated with commercial real estate, the outlook is better than it has been in the last seven years. We believe commercial real estate purchases made over the next two years will prove to be bargains for those willing to be patient.
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Title Annotation:Arkansas
Author:Kelley, Hank
Publication:Arkansas Business
Date:Aug 16, 1993
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