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Industry consolidation pushed by changing capital demands.

The real estate industry has emerged from "seven lean years," but investors and developers should not bank on a normal recovery cycle. Instead they should look for industry consolidations and a much slower pace of new development, predicts a leading real estate advisor.

"Historically, real estate is a feast or famine business, riding a cycle that goes from a low-fat diet to a seven-course gourmet meal," says Gary Lenz, managing partner of Arthur Andersen's worldwide real estate services group. "While many believe that we are again on the upward trajectory of the cycle, a sea change is under way in how real estate is used by business and viewed by investors. Those who continue to do business as usual will be left behind," he cautions.

For a growing number of major corporations, physical assets will be liabilities in the Information Age, Lenz notes. "We need to rethink our definition of real estate as a key asset in an era when electronic commerce is on the upswing."

The business locations of yesterday were the street comers where local grocers, car dealers and bank branches stood to serve customers, Lenz comments. Today's locations may just as likely be in cyberspace, like the Internet, where the customer has unlimited choices and where business can be conducted 24 hours a day without significant overhead.

Lenz says the United States stock market is propelling this trend, rewarding companies who are technology-driven or those who have reduced their physical assets. Companies seeking to maximize shareholder value must install new strategies to use their real estate holdings to enable their businesses to operate more efficiently, productively and profitably.

Lenz believes these currents will sweep corporate real estate worldwide and, recently, led Arthur Andersen to launch "Real Estate OneSource," the first global initiative by a Big 6 firm to help clients with major real estate holdings migrate more to electronic commerce. Under this initiative, the finn now offers consistent, integrated real estate services worldwide to ensure a full range of expertise in each region to counsel clients through this intricate transition, Lenz adds.

"Certainly the need for real estate won't disappear, but companies in many industries won't need new physical assets to expand their businesses and improve customer service," emphasizes Lenz, pointing to the success of a number of banks that have no physical locations. However, he notes, construction of new manufacturing plants and distribution facilities internationally - particularly in emerging economies - will continue strong.

This change in real estate use by business worldwide is one of the forces propelling the real estate industry toward consolidation, according to Lenz. The second is capital. "More capital is available today for real estate than anytime since the high-flying '80s," he says, "but expectations are different."

Investors are looking for operating companies not individual properties to finance, and they are demanding that real estate companies operate like other corporate entities.

The globalization of investment capital also is escalating change, Lenz says, "because Southern California now must compete with Thailand as well as Texas for capital."

Having just returned from a tour of Asian capitals, Lenz reports the threat of over-building in the Pacific Rim is very real and cautioned investors to understand the high risk nature of these ventures. "The supply of office and hotel properties is far outstripping demand and there will be a reckoning when all of this space comes on stream," he adds.

On the other side of the globe, European lenders are starting to address their real estate portfolio problems. "We are witnessing the birth of a secondary real estate loan market in Europe, but there's still much to be put in place to provide institutional buyers with the level of due diligence necessary for an informed decision," Lenz says.

Lack of infrastructure is hobbling development in Latin America, although these countries are pushing forward with major road, power and other projects, he says.

The remainder of the 90's will see renewed vision and interest in the real estate industry worldwide, Lenz concludes.
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Title Annotation:real estate
Publication:Real Estate Weekly
Article Type:Industry Overview
Date:Jan 22, 1997
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