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Predictions for the next 5 years.

Predictions for the next 5 years

Real estate executives, in the last several months, seem to be more optimistic about the recovery of real estate over the next five years.

While no one yet believes bottom has been hit, there are indicators that sellers are being more realistic while purchasers with cash are still out bottom fishing. Recovery has also been dampened by the large inventory of commercial space that seems to grow every day as more companies "right-size" their work forces and consolidate into smaller quarters. Jobs are opening for those with track records. Cash flow and the ability to pay for taxes, fees and services are problems that are still strangling owners and real estate businesses no matter what their size.

Larry Silverstein, president of Silverstein Properties, optimistically predicts the third or fourth quarter of '92 will show the beginnings of change and rebound with a firming of rentals and a quickening pace of leasing activity. It will be accompanied, he said, by increased activity in terms of both acquisitional and sales transactions. "Financings will begin to occur and the confidence in general should rise considerably," Silverstein added.

John P. Seligman, managing partner of Fink Weinberger, P.C., said he noticed at the Real Estate Board dinner that spirits tended to be higher than they were a year ago, and that the fear has begun to disappear. "I felt more acceptance and a greater sense that we've either hit the bottom or that these are the real pros left in the business," he observed. But Seligman believes it will be five years before there is any appreciable improvement in the market because real estate will lag behind any improvement in the rest of the economy.

Harold A. Lubell, a partner with Robinson Silverman Pearce Aronsohn & Berman, said he is still deep in foreclosures and also does not see any turnaround for five years on the commercial side, although he noted, "we are eating away" at our residential inventories.

Lubell also sees further problems for New York's middle class and affordable housing because of rent regulations as well as taxes. "One of the great challenges," he said, "particularly for the lower income rental properties, is the requirement for water metering. That's going to be a whopping burden. I feel badly for the poor guy who has a property where families have doubled up and the occupants stay home and use water. But," Lubell added, "I'm hopeful that things will get better."

Adam R. Rose, senior vice president, Dwelling Managers, Inc. which manages over 10,000 units in the metropolitan area predicts the return of co-ops. "Co-ops will once again be an acceptable purchase opportunity," he said, "as financial institutions and their representatives stabilize the existing buildings and work to remove the stigma previously attached to cooperatives." Rose said his company sold 800 co-op units last year. "We converted nine buildings and sold to both insiders and outsiders," he said, "but had to work hard to overcome the taint because of other people's problems." In the next year, Rose predicts that taint will fade away as an issue as sponsors resolve existing problems with lenders.

Edward N. Constantino, director of the real estate services group for the northeast region of the United States at Arthur Andersen & Co., said he sees the co-op and condo market remaining with many unsold units. He believes the high end luxury condos will do a lot better than those at the low end. "I don't think buyers of property believe real estate values have hit bottom," he observed. "Many who are trying to sell believe they can get more than they can. Buyers are not convinced prices are low enough and everyone realizes that if we don't have job growth the vacant space will not go away."

Constantino said the government must look at every possible way to stimulate this economy. While tax incentives will play a role, Constantino said, the ultimate objective is the creation of jobs, "not just the transfer of who pays for the mistakes." Unless the government on all levels helps to provide major incentives for job growth, Constantino believes the vacancy levels and overall health of the economy will take at least three to five years to begin to recover. New York lost jobs, he said, but unlike other recessions, these jobs will not come back. "These are middle management cuts and cuts in companies going completely out of business. When things come back, jobs will not be created. Companies are getting leaner and more efficient."

Donna Ryan, president of Francis Ryan Associates, which does real estate recruiting, said she's an optimist and sees a trend toward companies emphasizing their service aspects to keep their customers happy. They are concentrating on more high quality property management and leasing, she said, by taking the opportunity to upgrade their staff.

"There are excellent people out there who normally would be working," Ryan explained, "and the companies are keeping their staffs in top notch form to better serve the tenants." She said people who might have come into the real estate industry who are less serious, or with less experience, will find themselves another industry, but those who have accrued a lot of experience will be absorbed. "People who conduct themselves in a professional manner are always needed," she said. Additionally she has found that today's work force values a good job, in a company which will be around in the next ten years, more than the salary.

Constantino also believes the education for the workforce is important. "We fall woefully short on education as to what's going on in Europe and Japan," he said. "If we don't increase the caliber of children, we're going to have problems. The educational system needs significant revamping that starts from the ground up."

The challenge for the real estate industry, Constantino believes, is to keep the tenant base intact to make it desirable for companies to seek New York. He said it is important for New York to help deal with the consolidation of many of the companies, such as banking and others, which are "rightsizing" through merger, and trying to become more efficient. This will result in more space coming on board, he said, "and there must be incentives for more of that space to be absorbed."

Where landlords are attempting to lease space, Constantino said, they need to develop a "redeployment strategy" and become more focused to target companies and industry groups for their buildings.

Bruce A. Blum, CEO of Doral Hotels and Resorts, which has 11 hotels in New York, Florida, Chicago and Colorado, is developing its hospitality area strategy around the opportunities in the acquisition and management of distressed properties. He sees management openings for his company in turning around distressed property for institutions, particularly in cities where there was extensive overbuilding. "The opportunities we are looking at are typically existing properties where they are troubled properties which are independent and do not have a chain affiliation and could benefit from a chain," Blum explained. Typically, these properties have or are contemplating a golf, spa or corporate meeting area component, and in addition, Blum said, may have real

estate that is unexploited or distressed. Sometimes rooms are tired, he said, or the owners need new management, and "perhaps by putting the Doral name on, people are familiar with it and it could make a big difference." Telluride is a good example, he said, "where having the real estate expertise helped and having 20 condos drove the real estate financing there. One needs to be creative."

Blum expects 1992 to have more of the same kinds of problems the industry had in 1991. "I don't think most savy investors were necessarily waiting to proceed but many were still sitting on the side lines to see if the market has hit bottom." Blum believes some places such as the northeast are depressed more than other places.

"Interest rates are hitting 30-year lows and banks are starting to bolster their balance sheets and are being more flexible in striking reorganization plans, Blum said. So toward the end of the year we should see a bottoming out and a slight upturn by the end of the year both from a development standpoint as well as the occupancy rate in the northeast."

Blum said Doral had its best year in Florida which he attributes to the currency swings, the devaluation of the dollar, the comeback of the South American market and the broad appeal of Florida as a domestic destination. "It's booming," he said.

William Newman, chairman and CEO of New Plan Realty Trust, a REIT traded on the New York Stock Exchange, said he believes real estate prices are still going to be dropping. The softness of the economy in general is going to impact operating results, he said, while the lack of liquidity is going to limit the number of buyers and investors. Newman deemed these a plus for his company because, he said, "we have nothing but cash -- $275 million in cash." He said New Plan is one of the largest funds looking to buy real estate and is in the process of buying large quantities. "It's a buyers market and the REIT is a terrific vehicle which can raise money in this buyer's market.

New Plan is invested primarily in shopping centers with a few apartment building as well. "We used to be all office buildings in the 1960's," Newman explained, "but we're out of it and I'm happy and our shareholders are happy. Office buildings won't come back in our lifetime," he noted.

Does Silverstein still believe office buildings are a good investment? "If you can buy them right, absolutely!," he said.
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Title Annotation:Review & Forecast Section I; in real estate
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Jan 29, 1992
Previous Article:7,000 sf store lease on Fifth.
Next Article:1991 year of the property auction.

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