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Tough times not over yet in metro area.

Although recent reports all point to a sustained recovery for the nation's economy, we in the real estate industry, particularly in the Greater New York Metro Area, will probably see more of the same tough conditions that were experienced in 1992.

Cash for new construction projects, loans, work letters and expansion will be scarce due to overly restrictive bank loans. The worsening crisis in the commercial banking industry will further aggravate an already difficult lending situation. New federal (FDIC) underWriting and lending regulations effective March 1993 may further restrict credit to the starved market and add 'more bureaucratic burdens to gun-shy loan officers. We will continueto see caution in bank lending as well as an oversupply of office space in certain markets. Overall, there will be more of the generally poor economic conditions that have created a tough, lean and competitive environment for the real estate industry.

The downturn has affected everyone in the real estate industry - developers, brokers, managers, planners, architects, engineers, contractors and even the real estate department at some law firms. In order to remain competitive in bidding for work, many firms have had to hold or reduce their profit margins.

Commercial leasing brokers have to face new concessions in fees from owners feeling the economic pinch, hard competition and lower per square foot deals, further reducing their fee structure. The overall inventory of properties will be relatively stagnant since new construction has practically stopped; though the bright spot is that this lack of new product will assist to adjust the overall supply and demand on future real estate values.

Activity will be focused on the pentup sublease market with leases coming due soon. The additional inventory of expiring subleases is expected to aggravate the bloated supply, further compressing rental rates and placing somewhat obsolete class C and B buildings at a greater disadvantage to the hungry class A properties.

An area of uncertainty will be the tenant representative consultants. Will they be able to retain a significant share of business in such a competitive and ill market against conventional brokers offering varied services?

Retail space looks strong but in key areas with healthy anchors drawing traffic; well-planned diverse clusters of business in superior locations will attract spenders. Outmoded, worn shopping areas will continue to struggle.

Residential home sales and leasing appears to be recovering due to pent-up demand, lower interest rates and increase savings accumulated b" cautious consumers. This "recovery," however, will be in holding values almost at the level of inflation increases.

A word of advice -- after proper due diligence as to deal terms, "projecting" the market, etc. -- don't wait to close the deal. Too many deals are sidetracked by comparatively minor issues. In this market people are nervous, so avoid the nits and think "big picture." Remember, in many instances, yesterday's deal will be better than today's deal.

Fee management, both commercial and residential has drawn the scrutiny of cost conscious clients. Competition has been fierce and we'll see more owners traditionally on the sidelines as investors - take part in managing their own properties, further pressuring the fee managers. Many owners learned back in the mid-1970's that management contracts helped pay the bills when construction and development waned; more will join their ranks.

Sophisticated owners and asset managers will demand a higher level of accountability and reporting. Agents will have to be ahead of their clients with cost cutting ideas and recommending incentives for added value. A key element especially in the commercial sector, but not to exclude residential, will be early lease renegotiations to maintain tenants or avoid down time with vacancies. Also important will be reviewing and in some cases, renegotiating vendor and consultant contracts to demonstrate competitive pricing; this is now expected.

Pension funds have not replenished their inventory of real estate investments. 'The traditional target allocation of say 20% may not be reached until significant real estate appreciation is realized, not likely for 1993; They will, however, be more demanding to asset managers to hold expenses and increase income, together with more frequent reporting.

These are just some examples of how not to be caught napping by alert owners or by aggressive competitors offering enhanced services.

While the business climate will not radically improve in 1993, managers will still have opportunities, though they will work harder to secure them. REO properties are expected to increase as deficit funding and additional equity are depleted. Those specializing here and knocking on the right doors can capitalize on this market. Banking institutions may tire of carrying nonperforming loans, especially as real estate tax burdens increase.

Even governmentally supported lending entities, who are the last to throw in the towel, will cut their loses by divesting themselves of problem loans - similar to the Resolution Trust Corporation - in bulk or on a project by project basis.

Localities already feel the pain of real estate tax non-payment and certiorari proceedings from these troubled projects. For some, equity positions in troubled or deeply discounted properties may provide management fees and future appreciation.

Facilities management as a profession has expanded over recent years, capturing a piece of the management market. Its ability to show operating and financial efficiencies will decide future growth. Some FM's are offshoots of management companies with added sales value of the "parent" company expertise. Others are directly vying for the business. Specialization in either case is the appeal.

A bright spot emanating from the real estate and lending problems is for professional appraisers. A greater demand for their services is projected in 1993. This group has received new focus by virtue of recenfly enacted federal law mandating licensure. Appraisers, now more accountable, will play an enhanced role in a lender's decision-making process. Though seen by some as a party to the loose lending practices contributing to property and later bank failures, these professionals will now assist in rebuilding confidence in real estate as an investment.

Liquidity, loans for development and business expansion should be more available through some local and foreign sources though underwriters are still cautious. Developers, many of whom have been dormant over the last couple of years, will inch forward but focus primarily on the residential naarkets. Interest rates are slowly increasing but no major jump should occur in 1993 over 1992 rates unless radical changes in the world or national arenas occur. The Clinton administration's plan for reviving the economy, which has yet to take shape, obviously will have a profound influence over our destiny.

Optimistically modest amendments to the capital gains, passive loss rules and public money infused into enterprise zones or public works should be among the economic incentives made available by the new administration to prime our industry in 1993.

Always have the extra edge over the comnpetition. This means not only providing the best brochure, right proposal, enhanced services, with a highly qualified team but professional credentials as well.

Facing two apparently equal proposals, the potential client will look for certification from recognized professional organizations such as IREM or BOMA. These groups stress education in state-of-the-art real estate property mnanagement skills, education and busii ness ethics. To receive a professional designation such as CPM, ARM or RPA, one must pass stringent experience requirements, possess high ethical standards and comply with rigid educational testing requirements.
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Title Annotation:Property Management/Improvement; Section I; poor conditions expected in Greater New York Metropolitan Area real estate market
Author:Martino, Michael J.
Publication:Real Estate Weekly
Date:Feb 24, 1993
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