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Regional vice presidents roundtable: the year in review.

Regional Vice Presidents Roundtable: The Year in Review How do you anticipate that the real estate needs of the businesses and people in your region will change over the next few years?

Michael Simmons, Region 2: Many small companies in our area are merging or consolidating their branch offices. As a result, office leasing is becoming more difficult, especially for buildings geared to small space users.

Frank Ventura, Region 7: In Texas we are finally moving out of a real estate market that has been very depressed since 1985. As we bounce off the bottom, we have to be certain that we do not drown on the way up. The local financial institutions are still struggling, so there is not enough capital for even sound businesses to develop or expand. This lack of financing is not all bad, in that we are capping our construction, which should give us time to absorb some of the vacancies.

An advantage of the large amounts of vacant space in Dallas is that we have enough contiguous space to attract big corporate moves, such as Exxon, GTE, and J.C. Penney. And these corporations can get this space at a great price. Apartment sales have been strong, as have single-family home sales.

We will probably see a final cleansing of troubled financial institutions in the next 18 months. If stabilization becomes a little stronger, we should see the Texas economy coming back, although it will never be as strong as in the heydays of the early 1980s. Smaller cities will take longer to come back because they do not have the economic base of Dallas or Houston.

The fact of the matter is that there is a tremendous feeling of optimism in Houston and Dallas, which can be seen in all areas of business, including real estate. We have had great press on Texas's rebound over the last six months--with justification. It is a very exciting time for us now as we glide through the entanglements of the past and emerge with more knowledge and experience and with realistic expectations of performance.

Jules Galanter, Region 9: Many of the downtown business districts in the upper Midwest are becoming overbuilt, as developers shift their emphasis from suburban areas. Suburban communities are imposing more severe impact fees, so the disparity in development costs between CBDs and outlying areas is narrowing. Suburban office parks are also suffering from continued slow absorption.

Chicago has a 14-percent vacancy rate now, but many new buildings are going up. Most of these new buildings are being built for specific companies, most of which are already located downtown. This leaves many older buildings with rising vacancies. The sale of the Sears Tower fell through in part because of the tremendous amount of available space that would be created when Sears vacates 1.8 million square feet in the building. Sears Tower is about 15 years old, and they may have a difficult time leasing that space with all the new, smart buildings that are coming on line.

Mixed-use properties are also suffering because of high office vacancies. Several such buildings have recently gone into foreclosure because the numbers would work only if the commercial space was leased up.

David Parks, Region 6: Our region is so diverse that it is difficult to generalize; each city has its own identity. Even in Kentucky, Lexington is growing, while the population of metropolitan Louisville has been stagnant for seven or eight years. At the same time, Lexington is overbuilt, with more new apartments and permits than projected growth.

As an older population becomes a reality for Region 6, the real estate manager will have to show creativity in finding ways to adapt existing properties to meet demands for smaller units and supported living.

Retail will also have to adapt. While the older population may not buy as many goods and services, the elderly tend to buy higher quality, more expensive items.

Galanter: I was privileged to hear Dr. Martin Cetron, a noted futurist, speak recently. He pointed out that there were currently 26,000 people in this country over the age of 100, and that by the turn of the century that number will approach 250,000 people. Moreover, he felt that the majority of these people would still be capable of living in partial independence.

Alan Huffman, Region 10: So much of the housing stock in our area was built in the 1970s that it is becoming rather worn. Add that to the changing demands of an older population, and it will take some real innovation to make properties work. Some changes of use may even be needed.

The need for affordable housing will also continue into the next decade. Certain contracts with HUD will expire during the 1990s and the future of these government programs is not clear. CPM members need to be involved in providing those solutions.

John Bennett, Region 12: The issue of affordable housing is really two-pronged. One component involves section 221(d)3 and 236 projects eligible for mortgage prepayment in the coming decade. The second issue revolves around funding, the forthcoming expiration of project-based rent subsidy contracts, and the increasing need for capital repairs and improvements at many projects. It is important that HUD and Congress maintain momentum in the pursuit of solutions to these problems.

IREM and the property management industry also need to respond to changing demographics by continuing to expand available knowledge and expertise in the management of housing for the elderly.

Michel Mignault, Region 14: In most of our region, the younger people are leaving for jobs in booming areas such as Toronto and Vancouver. As a result, the age of the overall population is increasing rapidly. Vancouver is a hot-bed of activity especially with off-shore investors.

In the heavily agricultural provinces of Manitoba and Saskatchewan, the drought conditions of the past two years combined with an out-migration of between 5,000 and 10,000 people annually has drastically affected real estate markets. Industrial properties are rejuvenating in Manitoba, but multi-family and retail are overbuilt.

Both Calgary and Edmonton show signs of rebounding from the oil crash of a few years ago. As an example, the province of Alberta is embarking on a heavy oil upgrade project worth $700 million.

Ken Goodacre, Region 8: Of the eight chapters within Region 8, Las Vegas is by far the most active market, primarily because a younger population is moving in. The current net in-migration is similar in number to the growth experienced in Phoenix during the early 1980s. Much of this in-migration is coming from neighboring states in the region. It is all the real estate industry can do to keep up with housing needs.

Available jobs will also prompt young people to stay in Nevada. As an example, Las Vegas is adding 12,000 hotel rooms in 1989, creating an estimated 1.5 jobs for every room.

Don Creath, Region 4: Atlanta remains a preferred city for corporate headquarters, according to a recent survey of CEOs. The city still has an office vacancy problem, and the residential vacancy rate is near 10 percent.

Florida is the bright spot in our region, indeed one of the bright spots in the United States. The Florida real estate industry has been trying to meet the needs of an estimated 2.2 percent annual growth in population for the last few years. Developers built 16,000 new apartment units a year in both Broward (Ft. Lauderdale) and Palm Beach (Boca Raton) counties in 1986 and 1987, with a 95-percent absorption rate. Overall apartment vacancies in Florida are in the 6 to 8 percent range.

Office vacancies have not fared as well, with an 18-percent average vacancy in Florida. Some areas, such as Boca Raton and West Palm Beach, have over 30 percent vacant.

Orlando is well established as a tourist destination city, with direct flights from most major world capitals. Orlando has more than 70,000 hotel rooms, the most of any city in the U.S., with 5,000 new rooms coming on-line annually in recent years. Moreover, these hotels average greater than 90-percent occupancy.

Jo Anne Corbitt, Region 13: Our region is generally healthy, although there are problem pockets. One of the keys for continued growth in the mid-sized cities of our region is sound local government. For example, Charlotte has demonstrated that its government is very aggressive in seeking local business, in searching for palatable ways to finance infrastructure, and in ensuring that the quality of life is maintained. one of the advantages of the upper South in attracting business is its high quality of life, and most cities are working to protect this lifestyle as well as to grow.

The actions of local governments and how well they integrate into state and regional plans have a tremendous impact on keeping a balance between growth and liveability.

Transportation is a big item as many cities in our region have very limited mass transit. We have good airports with new hubs in Charlotte and Nashville and the world's largest distribution center (Federal Express) in Memphis, but highways in many cities will need expansion to accommodate growth.

Government must monitor growth, enabling the real estate industry to provide the types of offices, apartments, and shopping that are needed within the context of a controlled expansion.

George Myers, Region 1: If the Southeast is expanding, we are experiencing a major real estate correction in the Northeast. The decline in demand has been fueled by rapidly increasing real estate prices and the high cost of living.

On the supply side, we have seen tremendous overbuilding in residential markets for the last five years. Residential sales are off substantially from prior years throughout the region, and prices are down. First-time homebuyers and empty-nesters were the only two segments of the market still experiencing growth. However, the feeling is that these two areas of demand have now been satisfied, leaving many condominium projects still vacant and the banks extremely nervous.

Commercial vacancy rates are rising, up to 12 percent in Boston and Hartford and as high as 20 percent in Springfield, Massachusetts. The banks, insurance companies, and institutions are tightening their belts industry-wide.

In general, Region 1 is experiencing the bottom of a market cycle that has brought phebomenal growth in recent years. Today, we are working toward fine-tuning our property management skills to emphasize talents that this type of market offers.

Bennett: Region 12 is economically and geographically diverse, encompassing such metropolitan centers as Seattle, Portland, Spokane, Anchorage, and Boise. While the relative strengths of these markets vary, all are enjoying an upturn in economic activity. The strength of the Pacific Rim trade is a well-known factor, as are the successes of Boeing and several other mega-employers.

One symptom of the economic development and population growth has been the Puget Sound region's struggle to deal with the pace of expansion, particularly in terms of transportation and other infrastructure components.

Galanter: In an October market report published by Salomon Brothers, the firm stated that "areas that have unusually high home prices relative to income will face declining economic prospects in the 1990s, while those areas with relatively low home prices will see stronger growth."

Lawrence Jacimore, Region 5: Listening to these comments makes me think of what is happening in Region 5. With the exception of Birmingham, the region is so far in the doldrums that it is difficult to see very far into the future. Most cities are facing three to five years of available office space, specially in the Gulf Coast areas. Some areas have reversing occupancy from last year, as companies such as Amoco leave the area.

Our region is rimmed by air transportation hubs in Nashville, Atlanta, and Dallas, so it is difficult to get in and out of the region. This may result in slow business growth for the region in the years ahead. The Arkansas government is taking steps in anticipation of getting a mini-hub in Little Rock, which should improve transportation in the future.

Jack Biernaski, Region 15: Except in the major port of Halifax, the Maritime region of eastern Canada is experiencing a significant decline in growth and population. The fishing industry is decreasing, and the closing of many lines on the Canadian national railway system will harm growth in many rural areas. Quebec is also experiencing slow growth.

The bright spot in the region is Toronto. Traffic problems and an antiquated airport are having some negative effects, but office building construction remains strong. The suburbs are also expanding, so that some people are traveling more than an hour or two each way to work. Rent controls in the province have produced almost zero apartment construction, however.

One factor in this growth is a large amount of immigration, primarily from Hong Kong. Many of these immigrants are wealthy and are investing huge amounts of money in real estate. They are sometimes traveling several hours outside the city to find attractive purchases.

The free trade agreement with the United States should also promote strong growth in Toronto over the next 15 years as more trade barriers are reduced.

Coy Herring, Region 11: We share many of the problems faced around the country, although our population is growing in almost every city.

Lost Angeles averages a net population increase each year of 40,000 people. In the 1990s, the San Joaquin Valley will be an area of major growth, as people move farther out to find affordable housing. Riverside has seen this type of growth in the last 2 or 3 years as people have spilled over from the high prices in Orange County. The Sacramento Valley should also continue to grow. In Hawaii, there are virtually no vacancies in residential units.

A critical concern for the future in both California and Hawaii is providing housing for the elderly and for low-income renters. Home prices in both states are sky high. Condominium development will absorb some of the elderly and younger people, but federal money will be needed to help get subsidized programs off the ground.

Our region also faces environmental problems. Water is a scarce commodity in Hawaii and in many areas of California. There is also a problem in both states with insecticide pollution of fresh water wells. In Hawaii, they have had to shut down some wells. Insecticide pollution of water in the agricultural region of the San Joaquin Valley could adversely affect predicted expansion.

Traffic and air pollution also remain problems in most of the cities. And there do not seem to be any answers to these difficulties, at least not in the next three to five years. Taxpayers do not want to pay for the additional costs. As a result, more costs of infrastructure are being passed on to commercial developers and owners. It is a round robin type of problem with no clear solution.

How have concerns of water scarcity, pollution, and waste removal affected growth in other parts of the country?

Creath: In Florida, we have the potential with present technology to build out another 30 to 50 percent. Our limitations are not so much water, but waste disposal. On the Florida turnpikes you see hugh earthen mounds of landfills; they are going to be another problem.

However, we still need to manage our water carefully and preserve the Everglades ecosystem, Lake Okeechobee, and the artisan wells, which are our primary sources of fresh water for southern Florida.

Myers: Pollution has not yet become a crisis issue in the Northeast, but our area too is facing severe problems with trash disposal. Rhode Island has become the first state to make recycling mandatory, and 50 percent of the state is already following the program.

This requirement has resulted in phebomenal cost increases for property managers in the areas of trash removal. Our landfills are also at capacity. Everyone is searching for answers. Several trash-to-energy plants are now under contruction in New England, but the local communities are still fighting them.

Jarvis Edwards, Region3: Although our region also has trash disposal problems, a unique dispute over water rights has become one of our most pressing issues. The city of Virginia Beach relies on water from Lake Gaston, across the border in North Carolina. North Carolina is now fighting to retain this water, while Virginia is saying that the water belongs to whomever needs it. This situation has prompted a climate of very controlled growth in Virginia Beach. The impact of the Wetlands Act and the Chesapeake Bay Reclamation Act on development in the areas bordering the Chesapeake Bay is also unclear as of yet.

There has been so much resistance to trash-to-energy plants in the region that their future is uncertain. One of the cities in my region, for example, will use up all its landfill capacity in the next 10 to 15 years and foresees little likelihood of solving its disposal problems in the meanwhile. As a result, this city may be in the position of shipping its trash to other areas. We may even see regional trash storage areas developing in more sparsely populated areas.

Mandatory recycling has been discussed and seems likely to be implemented. Mandatory separation of combustibles, trash, and garbage and the wider use of incinerators also seem probable alternatives.

Mignault: We face the same problem in some provinces of western Canada, with the result that there is quasi-regulation of one province by another when the source of one province's water supply lies within the boundaries of another. Our federal government is now requiring environmental impact studies before any dams or other developments affecting water flow are permitted. Recycling is more popular, and advances in technology are creating better methods for dealing with refuse.

Galanter: Public opposition to incinerators is also being felt in our region, as city governments look for trash disposal alternatives. Everyone thinks incinerators are a good thing, but "not near me." The transport of radioactive materials through Illinois has also created a great deal of public concern, even when it is not stored in the state.

Our air quality in the Midwest has improved, although it is still far from clean. The supply of water is not an issue, although the quality of that water is. A great deal of money is spent to process raw water in the area.

Voluntary recycling is going to become an interim step in the trash removal process, one that will cost properties dearly.

Simmons: In New Jersey, mandatory trash recycling has been in effect in many cities for about six years. Now it is a statewide mandate for single-family homes, and the state is in the process of expanding the program to multifamily properties. The problem is that the state bureaucracy has not given much thought as to how this recycling will be implemented. When you turn something like recycling over to the residents in apartments, you often do not get needed cooperation.

Many townships are also beginning to extend recycling to office and commercial buildings.

Owners and managers of properties that have pump stations for waste water that feeds into municipal sewers have to bring in a licensed waste water manager to inspect and supervise these facilities. This individual must be registered with the state Department of Environmental Protection. Underground fuel oil storage tanks with capacities of over 1,000 gallons also have to be registered. All the factors contribute to increased operating costs.

Parks: In Region 6, we have a problem not only with our own trash, but with trash shipped into the region from the Northeast. The amount of trash being shipped only came to light locally because one train failed to get a required permit to carry it across state lines. A reporter from a local paper actually saw trash being unloaded from rail cars onto trucks to be transported into Indiana for dumping. The point is that even if you don't have a trash problem now, you are going to have one.

Biernaski: Eastern Canada, like the Midwest, has more of a water quality problem that one of water supply. At the same time we have had water rationing in southern Ontario for the past three summers because of drought conditions.

Acid rain is also a problem for Canada, both from pollution coming up from the Ohio Valley and from local industries such as Ontario Hydro, which continues to pump out tons of sulphur emissions into the atmosphere.

We still have some cities in eastern Canada that dump raw sewage into the St. Lawrence River or into the Bay of Fundy, but at the same time many larger cities are becoming heavily involved in recycling. In the 1990 budgets for our commercial properties in London, Ontario, we are projecting a 50-percent increase in trash disposal costs, a large portion of which is the result of new requirements for recycling cardboard.

Herring: At this same meeting last year, I predicted that we would be seeing more trash compactors in high-end apartments, and this is beginning to happen. But even when it is compacted, the trash has to be disposed of somewhere.

Simmons: One innovative idea I saw recently at a larger multifamily community in southern New Jersey was a commercial trash compactor. The owner had purchased three, 30-cubic-yard containers for the property and placed them around the site. I saw a maintenance man compacting an old appliance.

The manager of the property told me that residents had responded favorably and had little trouble operating the units. The compactors were key operated, which helped avoid accidents.

Edwards: Some higher priced condominium properties in Region 3 are also using commercial compactors, but they are operated by the maintenance staff to avoid liability. And it has worked very well.

Huffman: We have not found any creative ways to dispose of trash, but we have found an inexpensive way to remove it at one strip center. This property backs up to an expressway, and trash removal services pick up trash for free so that they can place their nice shiny dumpsters with the company logo in full view of the highway.

Corbitt: Davidson County passed a law several years ago that the county had to dispose of its own trash within its boundaries. We have a trash dash going on in Nashville now to locate new landfill sites; every site that has been proposed has been rejected by the neighborhood. We now have to find land in a county with escalating land prices to put garbage on, so we have created a problem for ourselves.

We have had a thermal transfer plan in downtown Nashville for 15 years that heats quite a few downtown buildings. That has been very effective, but it is small scale. We believe that a combination of landfill, thermal transfer, some incinerators, and some recycling will be needed to effectively deal with the waste disposal problem.

Medical wastes are another problem in our area because we have several large research hospitals. This is just another layer to the problem.

We have a company in Nashville that specializes in separating garbage components by machine. It is in use at a few small sites, and the company has recently received government funding to expand the program. These types of automated systems may be part of the answer for our trash disposal needs.

How has the role of the fee manager changed in response to the growing number of institutions entering the asset management field?

Jacimore: Most managers in Region 5 believe that institutions do not want to be in the management business, so they view increased institutional ownership as a positive. Fee managers do not have a conflict of interest that developers who are also trying to manage their own properties will face.

Bennett: To be successful, independent fee managers will need to expand their sophistication in financial reporting and fiscal administration. These managers will also need to exhibit an understanding of the supreme importance of value enhancement for the properties in their portfolios. It has been my observation that fee management organizations often have superior staff continuity and competitive pricing, both of which can benefit the client.

Galanter: In Region 9, there are quite a few developers actively seeking fee management contracts. While this has created competition, it has also created jobs.

Several years ago, our chapter ran a very successful seminar on how to get fee management business from institutions. One institutional representative said that one reason more fee managers do not get institutional business was because they did not ask for it. Too many fee management business owners took the position of "I can't get the business, so I won't even try."

The upshot of this was that the next morning I ran into a chapter member in the lobby of my building, which also happened to house the offices of this institution. This manager decided to ask for the work, and he came out with a fairly lucrative contract. Conditions may have changed somewhat in the last few years, but not that much. Many institutions do not want to be in the fee management business, but developers do.

Ventura: Existing property management companies are expanding rapidly in Texas with the rebound of the economy. Developers are opening property management departments and looking for third-party contracts. Out-of-state property management companies are also doing business in Texas. Large financial institutions are bringing more of their managements in-house.

Myers: In Region 1, the asset management departments of institutions, particularly insurance companies, have been consolidating and becoming more internally organized. They have been burnt by outside property managers and are looking in-house for management skills.

The banks have moved away from lending into workouts. Unfortunately for our region, the banks are also looking inward for property management expertise. Of course, they may come to realize that they need fee managers, but this may take a while.

Many mid-sized fee management companies are also consolidating and merging in the Northeast. Quite a few have also been acquired by larger companies. The small companies and the larger companies are doing well, but the medium companies are being squeezed by rising costs and the general slowdown of real estate activity in the Northeast.

Herring: In California, we are experiencing many of the same situations as our institutional clients do more in-house management.

The opposite side of the coin is foreign investors which are either opening their own management companies or buying existing firms. Many of the foreign management companies are very weak in tenant relations. They are also often hiring inexperienced personnel. Consequently, we have obtained some business in turnaround situations. But foreign firms will improve their expertise in the future.

Huffman: In Region 10, some developers and syndicators that opened management companies are coming to the realization that they need help, which presents opportunities for small and mid-sized fee managers. Managers should not overlook the possibility of joint ventures with these larger firms.

Goodacre: There is a strong market for the small- to medium-sized management company in Region 8 in the area of receiverships. Banks and other lenders seem to be looking for "conflict-free" management companies to handle REO properties. The encouraging part is that many of the management companies have been able to retain the properties in their management portfolios after the receivership ends.

Because most of our region is in such an extended downward cycle, some of the developers that went into property management when the cycle started have moved out of the business or are trying to buy established management companies to give them a base. Other developers are just getting out of the fee management business altogether.

Parks: The presence of an institutional owner is not really new. During the syndications of the early 1980s, we had dealt with limited partnerships. But too often fee managers fail to market themselves effectively. Some of the receiverships and other problems around the country could probably have been avoided if property managers had sold themselves to developers and institutions as consultants and helped stop some of these bad buildings from being built. These consulting positions are a major opportunity for the next decade, but we must put ourselves in a position to sell ourselves.

Note: The IREM regions include the following U.S. states and Canadian provinces.

1: Conn., Me., Mass., N.H., R.I., Vt.

2: Del., N.J., N.Y., Pa.

3: D.C., Md., Va., W. Va.

4: Fla., Ga.

5: Ala., Ark., La., Miss.

6: Ind., Ky., Mich., Ohio

7: Okla., Texas

8: Ariz., Colo., Nev., N.M., Utah

9: Ill., Minn., Wisc.

10: Iowa, Kan., Mo., Neb., N.D., S.D.

11: Calif., Hawaii

12: Alaska, Idaho, Mont., Ore., Wash., Wyo.

13: N.C., S.C., Tenn.

14: Man., Sask., Alb., B.C.

15: Ont., Que., N.B., P.E.I., Nfld., N.S.
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Title Annotation:Institute of Real Estate Management
Author:Bates, Malcolm
Publication:Journal of Property Management
Article Type:panel discussion
Date:Jan 1, 1990
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