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Professional management: new importance in '92.

Thomas Paine once wrote, "These are the times that try men's souls." For many in the real estate industry, and property management in particular, these words could have been written today. We all remember the 1980's, when every day saw more product at higher prices than the day before. This overabundance of new properties required and spawned a surplus of development and management firms. But now the rules have changed and, in order to survive, we all must find new ways to operate our businesses.

In 1992 we are likely to find ourselves in a holding pattern where everyone's primary objective will be the maintenance of assets. This does not necessarily reflect stagnation, but rather a period of adjustment. While real estate development is no longer the high-flyer we have become accustomed to over the last decade or so, we will see more opportunities and a stronger focus on professional management to help protect those valuable assets which have even greater future potential. Property management is one of the few real estate areas where one may expect to see increased business.

We are living in an era where cash is king - and real estate is an asset that can successfully produce cash under the right conditions and with the proper care. Years ago, some owners tried to manage their properties themselves but in these complex times, professional management is a requisite for any landlord who wants to preserve his assets. In addition, although many owners currently find themselves in a distressed financial position, others with available cash are buying properties at substantially reduced prices - prices that are unlikely to be seen again for the rest of this decade.

Sophisticated owners are now looking for management firms with proven records of operating financially successful properties as well as those that can keep troubled, non-performing projects afloat. Because management is a market-driven profession, the strong demand for experienced, competent management may result in higher fees and better returns for property managers.

In the bleak vista of the 1990's, we find construction jobs at a standstill and others soon to be taken over by lenders. Smart construction firms are looking to other areas for survival. Those who have done large commercial projects are now looking to housing. Unions are offering concessions in certain areas and, where necessary, workers are being laid off. The larger construction firms will probably survive. Most of the international companies learned their lessons well in the 1970's. Many of them have diversified - branching into areas such as management, appraisals and even the oil business.

For business, this is the time to shape up and slim down. Firms that survive the early 90's will be leaner and broader in scope. If they can adapt to this diversified role and task, they will be better prepared when the market turns around. Regardless of what happens to the economy in the rest of the country, I believe the 1991 recession will have an additional four-year-long impact on real estate. I don't see an upturn until at least 1993 or a full recovery until 1995 at the earliest.

One of the most important factors for future success in real estate is the maintenance of relationships with builders and owners. Whether you are a manager, architect, engineer or construction manager, an individual or a firm, it is imperative that you maintain your relationships through the hard times. Even though almost everyone around you is negotiating and offering concessions on prices and fees, remember that after the upturn, savvy owners and builders will want quality. If you have developed a strong relationship with your clients, you will have an easier time negotiating fees. They will try to negotiate fee concessions, but may better understand when you tell them you have reached your bottom price.

Not every firm that is in business today will be here in 1995. We are going to see a lot of shifting in the next few years with more consolidations, mergers and joint ventures. There is a pool of available talent ready for those far-sighted firms that will take this opportunity to develop extraordinarily well qualified teams to forge into the 21st Century. My guess is that the real estate industry in general, cutting across all disciplines, will see a 10-20 percent cut between now and 1995.

One specific bright spot on the horizon in 1992 is the Americans With Disabilities Act (ADA), which will provide a new, though temporary, infusion of business into the construction, architecture and engineering professions.

As of January, 1992, certain types of properties are required to remove all physical barriers that prevent full use of the property by the disabled. While many newer buildings were designed to be a barrier-free as possible, the major area of new business will be in facilities that must retrofit to comply with the law. Savvy contractors who specialize in barrier removal will be helped by ADA, but this will not be a panacea for the industry. Architects and engineers will have more immediate assistance from this law. Owners will be calling on architects and engineers to survey their properties and design barrier-removal removal plans. But because there is some flexibility in ADA in regard to time schedules and feasibility, the law will provide less immediate work than the design profession would wish.

The 1992 Presidential Election also will have a strong impact on the real estate industry. Incumbents will be required to demonstrate substance in their domestic policies. Regardless of party affiliation, the voting public will not be satisfied with superficial patching of the economy. Voters will be looking for realistic tax breaks and incentives, research and development credits, credit for promoting education, solar energy, geothermal.

In conclusion, real estate may never again be what it was in the 1980's. The theme of the industry has gone from "build, build, build" to "maintain and hold" for 1992. The inordinately high levels of "over the rainbow" appreciation could not, and should not, last forever. The industry needed an adjustment to a saner, more realistic level of appreciation. Unfortunately, it came at a time when the overall economy is in chaos. We will see more layouts, particularly in the Northeast. Other areas of the country will see a slow recovery with more responsible, forward financing. We will become accustomed to more competition and a greater focus on overall quality.

Many lenders, whose expertise is in managing capital, no real estate, suddenly find themselves with large real estate portfolios. While some lenders are putting more product on the market, many others are seeking experienced portfolio and property managers for workouts. Workouts have become a substantial segment of the recession depressed industry.

Lenders will show some flexibility on non-performing loans. There will be more spreading of risk on the lender's side, niche markets and build-to-suit. And for the first time in 1992, many owners and project colleagues will find that they must put some of their own fund into their projects in order to hold them.

A major change will also be the way in which real estate is perceived. Traditionally, it was viewed as cyclical but relatively stable. Now it will be seen as a more volatile investment and one that must be scrutinized and carefully underwritten.
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Building Management, Section II
Author:Martino, Michael J.
Publication:Real Estate Weekly
Date:Mar 25, 1992
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Next Article:International firms sign at The Crown Building.

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