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Making good in bad times.

Like the country, those in real estate are ready for a change. While some still wait for the return of the good old days, ever-resilient professionals are accepting the new realities and looking for new opportunities in the tough 1990s.

Unfortunately, there is little in the immediate economic or real estate pictures to be optimistic about.

Speaking before the Fall 1992 Urban Land Institute meeting, Kenneth Rosen, chairman of the Center for Real Estate and Urban Economics at the University of California at Berkeley, noted that real GNP growth has remained in the 1-to-2-percent range for the last five quarters and that unemployment in the third quarter of 1992 rose to 7.8 percent.

"We've had a couple of false signals for recovery and may be experiencing another false bounce at the moment," says Rosen. "In my view recession as measured by job growth will probably continue until mid-1993. Also keep in mind that this recession is a worldwide phenomenon. The economies of the world are declining, unemployment rates are up, and consumers are not buying. If the rest of the world is going down, it is really difficult for us to recover, even if we seem on the verge of improvement."

Experts differ about whether or not the Clinton administration will have much immediate impact on either the economy or the real estate sector. Rosen envisions "a much more activist government on a whole range of issues--urban reinvestment, housing programs, and infrastructure accelerations."

"Clinton's election could give a rapid jump to consumer confidence," predicts Leanne Lachman, managing director of New York's Schroder Real Estate Associates. "People are ready for a change."

"With a Democratic Congress and a Democratic White House, it is going to be difficult to predict how fast or how far our segment of the economy will move," says Bernard Van Til, CPM |R~, president of Flagship Property Group, Inc., in Grand Rapids, Michigan, and IREM regional vice president (RVP), Region 6. "There are bound to be changes, but the deficit and the difficulty of capital formation are going to dictate the agenda."

"I don't think that the election will make much difference to real estate, except perhaps psychologically," says Richard Kateley, executive vice president and director of investment research with Chicago-based Heitman Financial Ltd. "The Federal Reserve and other government agencies have some degree of control, but in a much narrower spectrum than was once the case."

The huge national deficit also limits government's ability to act, in Kateley's view. "The debt ties down one, if not both, of government's arms," he observes. "If you can't tax and you can't spend, there is very little opportunity to stimulate the economy."

Another potential result of a high deficit and attempts to stimulate the economy is rising inflation. "Eventually we are going to have to start paying off the $4 trillion debt and that is going to lead to some inflation," says T. Robert Burke, principal at AMB Institutional Realty Advisors in San Francisco.

While inflation has traditionally been a boon for real estate value, it could create a new set of problems in the present market. "The oversupply of real estate will make it extremely difficult for owners to pass along rising expenses to tenants," observes Burke. Higher inflation would also cause interest rates to rise, making credit even harder to obtain.

"I think that because we have excess capacity around the world we will be able to stimulate the economy without accelerating inflation until 1994 or '95," says Rosen. "And even then the increase will be small."

Once more around the path

With a quick economic recovery unlikely, real estate will still be struggling to overcome many of the problems spawned in the 1980s. "You have to think of real estate as foam rubber; until the rest of the economy expands and pushes on it, it is not going to move," says Michael Giliberto, vice president of New York's Salomon Brothers.

High office vacancy, low consumer spending at overbuilt strip centers, lack of available credit, and oppressive tax laws still plague the industry. The Russell-NCREIF Index for third quarter 1992 shows declines in returns for almost all property types, continuing the negative trend from 1991.

Giliberto believes that apartment properties represent the best short-term cash flow opportunities for investors. "Clearly, apartment projects have come out the leaders in the ability to recover near term," says Giliberto. "Retail, office, hotels, and even industrial are pushed out to 1994, 1995, and beyond."

"I don't see any significant change that will alter supply and demand imbalances," concurs Don O'Dell, vice president, asset management, with Northwestern Mutual Life Insurance Company in Milwaukee. "Even if we see an improvement in office occupancies from 18-percent vacancy to, say, a 14- or 16-percent vacancy level, it is not going to be enough to have any real positive effect on rental rates."

Yet, slowly and gradually, the industry is beginning to take on new life. To Lachman, the key word is "slowly." "Change is underway," she emphasizes, "but at a much slower pace than many of us expected." Lachman points to a gradual easing of credit and a gradual move toward securitization of real estate equity and debt as factors that will contribute to the recovery.

But if the industry is evolving slowly, energetic entrepreneurs are not waiting on the sidelines. Developers, managers, investors, and lenders are seeking--and finding--ways to survive and prosper.

At last, need-driven building

Perhaps the hardest hit segment of the real estate industry remains development. As new construction reaches a virtual standstill, developers are scrambling to become consultants, managers, built-to-suit specialists, anything to pay the bills. Within this horde, some firms have found real opportunities and re-invented themselves to take advantage of them.

A decade ago, Chicago's Stein & Company was a typical entrepreneurial developer--building, leasing, and selling its own properties--when it won a private competition to act as the developer/partner for AT&T Corporate Center. Their successful efforts against 10 other development firms convinced the firm that competitions were a viable way to attract business. They entered the public-sector competition to build the new Harold Washington Library in Chicago, and lost.

"The day we lost the library competition was the day we decided to submit a bid to the GSA for a new federal office building project in Chicago. This time we won," says Michael Szkatulski, the firm's executive vice president.

To meet the demands of the Chicago project, which required site selection, design, construction, and the first two years of management, the firm developed a joint-venture arrangement with construction, architecture, and service firms to bid on the project.

"These types of projects are definitely skewed toward larger firms because of the range of services required for a bid," acknowledges Szkatulski. "We had to build relationships that went across corporate boundaries to be competitive."

Time and overhead to prepare and repeatedly revise the bid package also means that a firm must have sufficient resources. Szkatulski relates that the firm's current bid for a GSA project in Detroit has been in progress for a year and a half, with no final decision yet. However, he adds, the GSA is now exploring new ways of procuring real estate services more efficiently.

As a client, the GSA has proved demanding, but not more so than other third-party clients, according to Szkatulski. "GSA has a very knowledgeable staff that knows what they want, and you have to supply it."

The firm has been able to use many of the same skills from working with the GSA to successfully service a variety of non-traditional development clients, including universities, corporations, hospitals, sports teams (the Chicago Bulls, White Sox, and Black Hawks), and the Metropolitan Pier and Exposition Authority for the expansion of Chicago's McCormick Place Convention Center.

"What we have found is that there are a variety of organizations with significant real estate needs who have not chosen to support those needs in house," says Szkatulski. "They need coordination and someone to identify and work for their goals. That is what we can provide."

Another firm that has identified a specialized development need and successfully pursued it is Atlanta's Carter and Associates. Carter's Healthcare Facilities division, headed by Vice President Charles G. Houston III, has parlayed the firm's 30 years of experience with corporate clients into developing, leasing, and potentially managing medical office buildings for hospitals.
Annual Performance for Years Ending September 30
Period Total Income Capital
1981 16.89 8.14 8.25
1982 11.83 7.82 3.79
1983 11.02 7.96 2.87
1984 14.87 7.37 7.12
1985 10.68 7.54 2.98
1986 7.68 7.35 0.50
1987 5.80 7.06 -1.20
1988 6.96 7.02 -0.06
1989 6.68 6.80 -0.11
1990 4.43 6.62 -2.09
1991 -2.51 6.91 -8.96
1992 -6.61 7.49 -13.35
Source: Russell/NCREIF Property Index.
September 30, 1992

"The opportunity to develop a medical office building came when development was slow, so we thought, 'Why not,'" says Houston. "But we found that it was a whole different world, like learning Chinese."

The Carter staff devoted a year to learning about health regulations, fraud and abuse statutes, housekeeping requirements, and a myriad of other factors that make these properties different. They hired consultants, attended seminars, and met with hospital administrators. Today the company has completed about $100 million of construction and leasing nationwide.

In addition to liability and regulatory issues, Houston found that the politics within a hospital were the biggest hurdle to overcome in successful development. "Because the doctors in the medical building are associated with the hospital, the administration would veto otherwise acceptable tenants just when you were ready to sign the lease," recalls Houston. "If you cannot figure out the politics of the hospital, you can't be a player."

Houston believes that because medical office buildings are not overbuilt, there is a legitimate demand. However, launching such an operation on a national basis requires significant working capital. "I and my staff have logged thousands and thousands of frequent-flyer miles this year," jokes Houston.

Real estate manager as chameleon

Developers are not the only ones looking farther afield to find today's opportunities. Real estate managers have embraced a variety of options--from REO management to corporate outsourcing--to stay afloat.

"The new business for management companies is receivership and REO business," says James Cantrell, CPM, partner in San Francisco's Cantrell Harris and Associates, AMO |R~, and IREM RVP, Region 11. "California has been hit by the recession, and banks and insurance companies are the only owners coming in."

"I think that workouts for small lenders are a terrific business opportunity now," concurs Bill Rothe, CPM, president of Koll Management Services in Newport Beach, California. "It is short-term business, but there are opportunities to establish long-term relationships."

"Rehabilitating and correcting deferred maintenance at these distressed and neglected properties is another area that presents opportunities for managers," notes Julia Banks, CPM, principal of Banks and Company in Denver and IREM RVP, Region 8.

The new divestiture strategies of the RTC present another avenue for managers willing to try something challenging. Agencies that buy property under the RTC's Direct Sales for Public Agencies and Non-Profits program must demonstrate that they have creditable financial and property management expertise to qualify for loans, according to Rosetta Parker, CPM, an affordable housing multifamily specialist at the RTC's Kansas City, Missouri, office.

"Skilled managers are desired and needed by both state housing authorities and non-profit groups," says Parker. "Many of these properties have been neglected and need extensive turnaround skills."

Parker estimates that there are approximately 100 properties now under negotiation in the direct sales program and another 300 in the pipeline. And because RTC guidelines require that these buildings remain affordable housing for 40 years, the need for management is a long-term one.

Another specialized company that has found opportunities in managing and acquiring RTC properties is Retirement Management Corporation of Atlanta. The firm acts as both a SAMDA contractor and a purchaser of independent living and assisted-living apartment properties in the South. Most of these properties are rentals.

"The industry has moved very aggressively into the area of rentals in the last five years," says Jeff Andrews, executive vice president of Retirement Management. "The buy-in communities have worked well for non-profit groups, but rental communities enable residents to find appropriate housing without making a long-term commitment. And at 80-plus, you really shouldn't be making many long-term commitments."

Although the industry is still a fledgling one, Andrews predicts that assisted living facilities will expand and begin to take on more of the rehabilitative functions once handled by nursing homes. However, he notes that the transition from apartment management to assisted living facilities is not always an easy one.
Forecasts for 1992-1997 in the Top Ten Markets
MSAs by Growth Rate
Category Ranking 1987-92 1992-97
Population Growth
1 West Palm Beach, FL 3.39% 2.85%
2 Orlando, FL 4.16 2.45
3 Phoenix, AZ 2.81 2.36
4 Denver, CO 0.93 1.93
5 Atlanta, GA 2.49 1.92
6 San Diego, CA 3.09 1.90
7 Houston, TX 1.56 1.86
8 Dallas, TX 1.56 1.82
9 Fort Worth, TX 2.18 1.54
10 Columbia, SC 1.12 1.39
U.S. Average 1.16% 1.00%
Household Growth
1 West Palm Beach, FL 3.87% 3.18%
2 Orlando, FL 4.58 2.76
3 Phoenix, AZ 4.02 2.68
4 San Diego, CA 3.09 2.22
5 Atlanta, GA 2.89 2.20
6 Houston, TX 1.87 2.16
7 Denver, CO 1.92 2.16
8 Dallas, TX 2.97 2.12
9 Columbia, SC 2.07 1.72
10 Seattle, WA 3.55 1.62
U.S. Average 1.75% 1.27%
Total Employment Growth
1 West Palm Beach, FL 2.39% 3.74%
2 Orlando, FL 3.56 3.31
3 Phoenix, AZ 2.57 3.04
4 Atlanta, GA 2.29 2.61
5 San Diego, CA 3.13 2.56
6 Denver, CO 1.68 2.49
7 Dallas, TX 1.62 2.49
8 Houston, TX 3.38 2.45
9 Columbia, SC 2.52 2.34
10 Seattle, WA 3.78 2.31
U.S. Average 1.63% 1.70%
Contract Construction
1 West Palm Beach, FL -5.23% 3.09%
2 Orlando, FL -1.00 1.63
3 Portland, ME -2.83 1.34
4 Phoenix, AZ -3.68 1.28
5 Richmond, VA 1.11 1.20
6 San Diego, CA 2.18 1.17
7 Seattle, WA 4.62 1.13
8 Fort Worth, TX -1.63 1.04
9 Atlanta, GA -0.80 1.03
10 Nassau-Suffolk, NY -2.03 1.01
U.S. Average -0.29% 0.61%
Source: NPA Data Services, Inc.; compiled by Valuation Network,
Inc., Minneapolis

"This business is one of great staff intensity and service management," says Andrews. "We provide food service, activities, administration, maintenance, housekeeping, and in some cases nursing. Apartment managers do not always have the administrative skills required."

According to Andrews, marketing may be the most accessible way to enter the retirement housing field. But again, the emphasis is different. "Nobody moves into assisted living because they want to," he remarks. "They move because there is a need. This makes the units very difficult to market."

Another huge bulge in the demographic models--the baby boomers--represent an opportunity, according to Lachman. "The first of the baby boomers are reaching their top earning and spending years," she explains. "Some of that money will be saved, but some of it will be spent on recreational housing."

Lachman favors vacation homes and resorts located within two to three hours of metropolitan areas. She points out that the trend toward more and shorter vacations will benefit these areas, as well as golf courses and resorts with easy air access.

Hand to hand in the trenches

If RTC divestitures offer opportunities for fee management, so do smaller size properties being "rationalized" out of institutional portfolios and bank REO pools. Small groups of private investors are beginning to buy $1 million to $2 million suburban office and strip centers at distressed prices.

"To a bank or insurance company, a single suburban office not located near other properties may not be worth the trouble," explains Jacques Gordon, vice president of investment research for New York's Baring Institutional Realty Advisors. "But to a local investor, such a property is often viable."

However, Gordon cautions that not every distressed property is a bargain, no matter what the price. "A property must have recovery potential; it must be in a market that has a sound economy and it must meet the specific requirements that an area's recovery will take."

Managing these smaller properties offers an attractive niche for local management companies, says John Gallagher, CPM, senior vice president and director of property management for Shannon & Luchs in Bethesda. "Rather than trying to position themselves against a larger and more powerful national company, smaller managers can solicit these B buildings by emphasizing their local contacts and their ability to bring a network of area experts to bear on the property," explains Gallagher.

Even then, managers must continually sell themselves to new owners. "Reputation alone is no longer enough to generate business," notes Steven Easton, CPM, sole owner of Easton Realty in St. Petersburg and IREM RVP, Region 4.

Competition remains fierce. "Larger firms are willing to go into smaller cities and offer more services at lower fees than small management companies can afford to do," notes Sara Springfield, CPM, ARM |R~, vice president of management services for TPMC, Inc., in Dallas and Houston. Springfield, the IREM RVP for Region 7, also finds that more private owners are managing their own assets or hiring in-house managers.

"Many of the life companies have also entered the management field, either by building their own departments or acquiring management companies," says Kateley. "Some already manage their own properties, and they are formidable competition."

But Kateley advises that this very competition and the high turnover of managers it creates presents its own opportunities. "It used to be possible to just get a pass from an owner, but today there is a tremendous amount of scrutiny," says Kateley. "It may not always be very profitable, but turnover creates chances for work."

While lower fees remain widespread, Burke believes that investors are beginning to realize that reducing fees beyond a certain point is counterproductive. "It provides a negative incentive to good management," he remarks.

Kateley agrees: "You reach a point where people begin to say, 'It's cheap, but I'm not getting much.' That is when you begin to see fees pick up." Kateley predicts that while 1993 may still see low-fee pressure, the curve will begin to turn up by year end.

Rothe sees a chance for greater fees by consolidating the work of the property and asset manager in one position. "Much of the financial analysis work is already being pushed down to the property manager," says Rothe. "There is a trend in the industry for one entity to assume the work of both managers, at a fee of about 75 percent of the amount paid to both managers."

"Consolidations and mergers of firms are a positive as well as a negative. Because life companies and banks are beginning to recognize quality, the real management professionals will survive," concludes Cher Zucker-Maltese, CPM, vice president, commercial and industrial for Prudential Property Company in Newark and IREM RVP, Region 2.

Finally, money--if you qualify

If managers and institutional owners are struggling to realize a profit, the same is not true of the financial side of real estate. "There are some very good opportunities now to do straight mortgages to refinance some of the loans the life companies simply no longer want to service," says Kateley. "Yields are 225 to 250 basis points above 7-to-10-year Treasuries, and debt service ratios are 1.25 and above."

Kateley acknowledges that with the loan-to-value ratios remaining in the 50-to-65-percent range, finding the borrowers able to qualify for such loans is not always easy. However, most experts expect there to be a significantly higher level of transactions in 1993.

"The low interest rates are beginning to bring the individual entrepreneurs back," says Gordon. "Lenders are not exactly out there pushing each other out of the way to make loans, but there are smaller deals being made at the local level."

"Refinancing of older apartments with built-up equity is beginning to occur," says Pamela Monroe, CPM, vice president of apartment management for MBI Management in Mobile and IREM RVP, Region 5. "But lenders are very stringent and require detailed information on everything, including who manages the property."

Lower pricing of assets will also help fuel a much higher volume of transactions in 1993, according to Kateley. "We are seeing people who have been on the sidelines for the last 12 to 24 months begin to be active."

Despite this anticipated rise, the credit crunch and concerns over illiquidity continue to build interest in securitized real estate vehicles, including REITs, securitized commercial mortgages, and a private secondary market in commingled funds.

"I think we are going to see considerable growth in REITs as a means for the individual investor to buy commercial real estate," says Lachman.

"Some new securitized pools of equity assets are yielding between 8 and 9 percent, compared to about 3 or 4 percent for Treasuries," seconds Giliberto. "This sort of spread has attracted some institutional capital as well as private investors."

"I think that the significance of REITs has been overstated," argues Burke. "There are so few positive things happening in real estate that people are seizing anything they can."

Burke points out that the overall pool of securitized real estate is still very small for the needs of the pension fund or institution. Moreover, he feels that if inflation comes, many REITs may be written down substantially.

"Many of the REITs have been overplayed," concurs Gordon. "But some of the equity ones with a track record of management in place, especially those based on retail properties, offer liquidity options to pension-fund investors."

Pension funds and their advisors are also exploring ways to enhance liquidity by trading units of existing commingled funds of property.

Burke explains: "There are over 100 commingled funds with between $40 and $50 million in assets. There is an effort underway, spearheaded by Blake Eagle of the Frank Russell Company and Barbara Cambon of Institutional Property Consultants, to develop a centralized clearinghouse of information on the funds for buyers and sellers. Industry-wide interest in cooperating to make this private secondary market work has been very strong thus far."

Led by the RTC, a secondary market for commercial mortgages seems to finally be nearing reality, most likely in the form of mortgage-backed REITs. "The question remains, can the institutions that hold these loans afford to mark them to market in order to securitize," wonders Giliberto. "Some banks, such as First Chicago, are already taking writedowns, but many more are not yet willing to take the hit."

Half empty, or half full?

Ultimately, it seems that 1993 will be a continuation or even an intensification of 1991 and 1992. The difference is a level of acceptance, a willingness to work within the new realities.

"People are worried about losing their jobs," says O'Dell. "Once they begin to feel more comfortable about what their income levels will be next year and the year after, they will gain more confidence in buying at our shopping centers and renting a nicer apartment. An upturn in spending will be an early signal of improvements in occupancies and rents."

"There are tremendous problems in real estate, but if they are approached with energy, they present opportunities," says Stephen Roulac, managing partner of The Roulac Group in San Francisco.

Ray Wirta, CPM, CEO of Koll Management Services, agrees: "It is not going to be a bed of roses, but we are starting a slow, steady climb up the slope."

"What I see is a new sense of optimism and willingness to be flexible," concludes Kathleen McKenna-Harmon, CPM, president of McKenna Management Associates, Inc. in Minneapolis and IREM RVP, Region 9. "There has been a lot of complaining, but now people are beginning to concentrate on what they can do, instead of worrying about what will happen to them."

In 1993, as so often in the past, this combination of optimism and hard work should create a positive change for real estate.

Regional Vice President Reports

Region 1: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont

Richard Williams, CPM

The region is lackluster, with Boston's unemployment standing at 9 percent. Residential has 93 percent physical occupancy, but economic occupancy of only 85 percent. Suburban office vacancies have reached 30 percent, with tenants cutting deals. Western Massachusetts also faces high unemployment and apartment vacancies, as renters become homeowners.

Rhode Island has not reached bottom yet, as apartment vacancies continue between 10 and 15 percent. Commercial vacancies range between 15 and 20 percent.

Connecticut suffers from defense and service-sector cutbacks, leaving commercial vacancies at 20 to 25 percent. Residential properties have vacancies in the range of 12 to 18 percent.

Region 2: Delaware, New Jersey, New York, Pennsylvania

Cher Zucker-Maltese, CPM

The region remains nervous as Wall Street continues to shed employees and a major insurance company goes into rehabilitation. Areas with higher living and employment costs are losing ground to lower-cost areas, changing real estate demand. A move by a major employer from norther New Jersey to the Scranton area is just one example. Generally, office tenants are still trading up to better, albeit smaller, space.

Office vacancies in Central New Jersey reached 20 percent for the third quarter of 1992, with Manhattan and Philadelphia showing similar vacancies. Northern New Jersey showed an office vacancy of 26 percent, while Westchester topped the group with 27 percent vacancy in the CBD. Foreclosures are picking up speed, although few expect the problems to be as severe as those encountered in the Southwest a few years ago.

On the other hand, the multifamily residential rental market is solid. The retail market is concentrating on renovating existing regional shopping centers; however, new development of strip centers has continued--much to everyone's dismay. These strip centers exhibit both high vacancy and high turnover, which will not improve until late in the economic recovery cycle.

Region 3: D.C., Maryland, Virginia, West Virginia

Perry Ives, CPM

Washington, D.C. has 10-percent office vacancy downtown, with many leases up for renewal in the next two or three years. Suburban office has vacancies in the teens. The Baltimore market is also soft, with rising vacancies.

Residential rents are steady, with occupancies of 93 to 95 percent. Residential turnover is between 25 and 30 percent. Retail activity is flat.

Region 4: Florida, Georgia

Steven Easton, CPM

This region's brightest spot is Atlanta, where they are experiencing positive growth, primarily in the service sector. However, office vacancies in the CBD still top 24 percent, with suburban office at almost 19 percent. Decreasing absorption is expected to lower rents further, as will RTC auctions.

Macon fares little better, with 85 percent suburban office occupancy, but only 77.5 percent in the CBD. Retail occupancy has reached 80 percent.

Orlando can no longer generate business on its reputation alone, but with its office vacancies at 15 percent, it is still outperforming many cities in the region. Retail is the hardest hit, with 21 percent vacancy, while industrial and apartments both have vacancies of 10 to 11 percent.

The Gainesville area of Florida has a 20-year supply of retail, with rents at only $7 per square foot. Office and apartments seem little better, with apartments helped by a demand for student housing. Unemployment stands at 10 percent.

Jacksonville's dependence on the military promises future problems, although current apartments are 91 percent occupied. Industrial occupancy is comparable, but retail has a 20-percent vacancy.

Hurricane Andrew has contributed to a surge in space absorption in Miami, but the long-term effect may be dwindling jobs and reduced demand.

Region 5: Alabama, Arkansas, Louisiana, Mississippi, Florida Panhandle

Pamela Monroe, CPM

The election of Bill Clinton is not the only surge in this region. Last year's bleak picture has been replaced by the beginnings of recovery. The second half of 1991 saw a gain of 288,000 jobs.

Little Rock has suburban office occupancies over 90 percent, and CBD occupancies of 83 percent. Retail occupancy also stands at 90 percent. Apartments hover in the mid-90 percentiles, with retirement communities continuing to see growth.

New Orleans has revived from the worst of its problems. Office, retail, and apartments are all occupied in the 90 percents. Apartment construction remains at an all-time low in the state. Hotels still have vacancies between 25 and 27 percent, but the construction of 600,000 square feet of gaming space before 1995 is expected to help reduce that figure.

Retailing has become an economic force in Birmingham, as wholesaling becomes a major source of jobs. However, the University of Alabama still employs 16 percent of the city's workforce. Office occupancy holds at 76 percent in the CBD and 82 percent suburban. Vacancies in apartments hover below 5 percent.

Both Montgomery and Mobile are looking up, with apartment occupancies of 97 to 98 percent. An influx of new industry has reduced Mobile office vacancy to 15 percent. In Montgomery, suburban office is only 5 percent vacant, rising dramatically in the CBD to 50 percent.

The relatively stable Jackson, Mississippi, market has achieved 85 percent occupancy in office and 90 percent in apartments.

Region 6: Indiana, Kentucky, Michigan, Ohio

Bernard Van Til, CPM

This is the comeback region, with economic recovery underway. Virtually all secondary markets of the region are experiencing positive job growth, and there is even some new construction. Once referred to as the "rustbelt" in a derogatory manner, pockets in the market are positioned for prosperity.

The region's primary markets, i.e., Grand Rapids, Indianapolis, Columbus, and Cincinnati, are considered strong secondary markets for national lenders. The stability of the region, coupled with a continuing moderate growth in these markets, has them poised for prosperity. Most of these secondary-market investments have and will continue to outperform similar assets in primary-market portfolios.

Cleveland, as a market somewhat between a primary and true secondary market, is a good example of the region's dynamics--with $5 billion in new downtown development, four new luxury hotels, and an $11.3 million lakefront park. Now under construction is the $344 million Gateway sports/entertainment facility.

Region 7: Oklahoma, Texas

Sara Springfield, CPM

The picture in this region is brightening, after several years of tough times. Texas has outpaced the nation in job growth for the last two years, but new construction in Dallas has driven CBD vacancies to a new high of 32 percent. However, occupancy rose in several suburban markets, including areas along the North Central and LBJ Freeways and in far north Dallas. Tarrant County vacancies are projected at 20 percent for 1993.

Dallas apartment occupancies remain in the mid-90s, but rents are stalled. Retail occupancy has risen for the second year, although neighborhood centers are facing vacancies. Occupancy in industrial is 85 to 87 percent.

San Antonio has seen a decline in unemployment thanks to corporate relocation and a net absorption of 1 million square feet of commercial space in the last year. Although Class A space is 82 percent occupied, rental rates show little improvement. Multifamily is very healthy, with 96 percent occupancy, San Antonio's highest since 1981.

Houston remains flat, with no real commercial absorption in third-quarter 1992. A limited amount of construction is underway in high-end apartments. West Texas (Midland) has seen declines in its overall economy in the last year.

El Paso has seen a 24 percent population increase in the last decade, keeping unemployment in the 10-percent range. The new free-trade agreement may impact El Paso, as it already has over 10,000 residents working in Mexico. Industrial occupancy is at 94 percent, with office ranging from 85 percent in the suburbs to 79 percent in the CBD. Apartment occupancy stands at 90 percent, with some increases in rents. Retail shows signs of improvement, although strip centers have high vacancies due to overbuilding.

Metropolitan Austin expects a moderate 2 percent job growth in 1993, with growth in construction jobs and in the service sector. Office occupancy has climbed to 81 percent, with a 3 percent average rent increase in 1992. Retail has an average occupancy of only 74 percent, but construction continues on a new regional mall. Multifamily occupancies average 94 percent, with 1 million square feet absorbed in the last two quarters. Rents have increased as much as 15 percent in the last year.

Oklahoma City still faces a recession, although it is outperforming the U.S. economy as a whole. Moves and closures by major office users may spell higher vacancies in 1993.

Region 8: Arizona, Colorado, Nevada, New Mexico, Utah

Julia Banks, CPM

After some tough times, things look brighter in Region 8. Colorado and Utah are on the upswing, while the remainder of the region is steady.

Utah is growing at 5.2 percent, with under 4 percent vacancy in apartments and malls, but up to 20 percent in office and strips. Single-family construction is strong, and unemployment is only 5 percent.

Phoenix is still suffering from a depressed economy and overbuilding, with office vacancies of 27 percent and retail at 12.4 percent. The apartment market is in single-digit occupancy, and single-family home starts are up 35 percent from 1991 on a population growth of 2.5 percent. Tucson has a strong apartment market, but heavy owner occupancy results in industrial vacancy as high as 38 percent. Office vacancies stand at 23 percent, with retail at 15.3 percent.

Denver has reduced apartment vacancies to 4 percent, even with strong construction of single-family homes. Office stands at 20 percent vacant and retail at 13 percent. Colorado Springs presents a similar picture.

Construction continues to enable Las Vegas to grow at 5 percent, although water availability may check expansion. Apartment vacancies are 10 percent, and the city has five new industrial sites. Reno has a 3-percent growth rate, with 28 percent vacancy in office and 18 percent in retail.

New Mexico remains little changed from 1991 with an improvement to 3 percent apartment vacancy and strong industrial, but 30 percent in office. Retail presents a divided picture, with malls 100-percent occupied, but strips with vacancies of 50 percent.

Region 9: Illinois, Minnesota, Wisconsin

Kathleen McKenna-Harmon, CPM

The upper Midwest has seen some downward shifts this year, reflecting a late-coming recession. Apartment vacancies are lowest in Madison, between 2.0 and 3.4 percent. Both Chicago and Central Illinois have vacancies between 4 and 9 percent. Minnesota have vacancies from 5 to 7 percent. In all areas, numbers may be actually be higher as RTC and other distressed properties are often not calculated into estimates.

In Minnesota, the big news is the Mall of America. This huge new retail complex is pulling nationwide; 40 percent of shoppers are from out of state.

Region 10: Iowa, Kansas, Missouri, Nebraska, North Dakota, South Dakota

Dorcas Cecil, CPM

The region has been less hard hit by the recession than some other parts of the country, and a few cities--Des Moines, Wichita, and Omaha--are doing very well. Omaha has an unemployment rate of less than 5 percent, and apartment vacancies of less than 4 percent, even with new construction. Office vacancies vary between 10 and 15 percent.

Des Moines is experiencing a boom with only an 11-percent office vacancy rate, thanks to growing white-collar employment. Apartment vacancies are less than 3 percent, with quite a bit of new construction underway.

Kansas City remains weak with between 18 and 25 percent office vacancy and declining rental rates. Unemployment ranges between 5 and 6 percent, but white-collar jobs are hardest hit. Retail remains spotty, although mall occupancy has reached 90 percent. Strip centers report 80 percent occupancy. Apartments are strong, with Class A almost fully occupied at the expense of Class B, which have vacancies as high as 25 percent.

St. Louis remains stagnant, with job cutbacks offsetting any gains. Office occupancy for the third quarter of 1992 was 82.4 percent for office space, down slightly from the second quarter. However, absorption remains generally positive. Apartments have occupancies between 88 and 92 percent, but rents remain flat.

Region 11: California, Hawaii

James Cantrell, CPM

This region is generally worse off than a year ago, as the rest of the country's recession has finally reached the Far West. The hurricane devastation in Hawaii has further dampened tourism. California's jobless rate has officially reached 9.8 percent, but many feel it is closer to 14 percent. Receiverships and REOs are the new business opportunities, especially in southern California.

San Francisco office vacancies have remained near 10 percent throughout 1992, although they saw slight improvement in the third quarter. Older buildings are facing vacancies as high as 20 percent. Rents have been dropping steadily for the last year.

Region 12: Alaska, Idaho, Montana, Oregon, Washington, Wyoming

Craig Suhrbier, CPM

The region is healthy, relative to most other parts of the country. Seattle was rated as the best city for business in America by Fortune magazine. The nation's largest exporter (Boeing), a highly educated work force, and the closest major port facility to the Pacific Rim helped win this position.

Unemployment in Washington and Oregon averages 6 to 7 percent. Industrial is almost fully occupied, and office vacancies hover around 10 percent.

Region 13: North Carolina, South Carolina, Tennessee

Mel Ediger, CPM

Although the picture here is not all rosy, it is far from negative. The South Carolina resort area economy appears to be booming. Job growth throughout the region is positive, especially in office-oriented areas, such as services and government. Manufacturing distribution, and transportation are experiencing some job losses, but not as much as during 1990 and 1991.

Even in the face of a slow recovery from the recession, Charlotte, Memphis, and Nashville continue to attract new companies opening offices, plants, and warehouses. (In Nashville, industrial space is 98 percent occupied.) Average office vacancies are moving in two directions at one time in most areas, with suburban vacancy rates dropping and inner-city vacancy rates climbing.

The brightest picture is in multifamily, with most areas of the region having single-digit apartment vacancies, although little, if any, new construction is underway.

Mariwyn Evans is the executive editor of the Journal of Property Management.
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Title Annotation:how real estate managers cope in the current US economy
Author:Evans, Mariwyn
Publication:Journal of Property Management
Date:Jan 1, 1993
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