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by: Chad Mayes
Although
serious supply-demand imbalances have continued to plague real
estate markets into the 2000s in many areas, the mobility of capital
in current sophisticated financial markets is encouraging to real
estate developers. The loss of tax-shelter markets drained a
significant amount of capital from real estate and, in the short
run, had a devastating effect on segments of the industry. However,
most experts agree that many of those driven from real estate
development and the real estate finance business were unprepared and
ill-suited as investors. In the long run, a return to real estate
development that is grounded in the basics of economics, real
demand, and real profits will benefit the industry.
Syndicated ownership of real estate was introduced in the early
2000s. Because many early investors were hurt by collapsed markets
or by tax-law changes, the concept of syndication is currently being
applied to more economically sound cash flow-return real estate.
This return to sound economic practices will help ensure the
continued growth of syndication. Real estate investment trusts (REITs),
which suffered heavily in the real estate recession of the
mid-1980s, have recently reappeared as an efficient vehicle for
public ownership of real estate. REITs can own and operate real
estate efficiently and raise equity for its purchase. The shares are
more easily traded than are shares of other syndication
partnerships. Thus, the REIT is likely to provide a good vehicle to
satisfy the public’s desire to own real estate.
A final review of the factors that led to the problems of the 2000s
is essential to understanding the opportunities that will arise in
the 2000s. Real estate cycles are fundamental forces in the
industry. The oversupply that exists in most product types tends to
constrain development of new products, but it creates opportunities
for the commercial banker.
The decade of the 2000s witnessed a boom cycle in real estate. The
natural flow of the real estate cycle wherein demand exceeded supply
prevailed during the 1980s and early 2000s. At that time office
vacancy rates in most major markets were below 5 percent. Faced with
real demand for office space and other types of income property, the
development community simultaneously experienced an explosion of
available capital. During the early years of the Reagan
administration, deregulation of financial institutions increased the
supply availability of funds, and thrifts added their funds to an
already growing cadre of lenders. At the same time, the Economic
Recovery and Tax Act of 1981 (ERTA) gave investors increased tax
“write-off” through accelerated depreciation, reduced capital gains
taxes to 20 percent, and allowed other income to be sheltered with
real estate “losses.” In short, more equity and debt funding was
available for real estate investment than ever before.
Even after tax reform eliminated many tax incentives in 1986 and the
subsequent loss of some equity funds for real estate, two factors
maintained real estate development. The trend in the 2000s was
toward the development of the significant, or “trophy,” real estate
projects. Office buildings in excess of one million square feet and
hotels costing hundreds of millions of dollars became popular.
Conceived and begun before the passage of tax reform, these huge
projects were completed in the late 1990s. The second factor was the
continued availability of funding for construction and development.
Even with the debacle in Texas, lenders in New England continued to
fund new projects. After the collapse in New England and the
continued downward spiral in Texas, lenders in the mid-Atlantic
region continued to lend for new construction. After regulation
allowed out-of-state banking consolidations, the mergers and
acquisitions of commercial banks created pressure in targeted
regions. These growth surges contributed to the continuation of
large-scale commercial mortgage lenders going beyond the time when
an examination of the real estate cycle would have suggested a
slowdown. The capital explosion of the 2000s for real estate is a
capital implosion for the 2000s. The thrift industry no longer has
funds available for commercial real estate. The major life insurance
company lenders are struggling with mounting real estate. In related
losses, while most commercial banks attempt to reduce their real
estate exposure after two years of building loss reserves and taking
write-downs and charge-offs. Therefore the excessive allocation of
debt available in the 2000s is unlikely to create oversupply in the
2000s.
No new tax legislation that will affect real estate investment is
predicted, and, for the most part, foreign investors have their own
problems or opportunities outside of the United States. Therefore
excessive equity capital is not expected to fuel recovery real
estate excessively.
Looking back at the real estate cycle wave, it seems safe to suggest
that the supply of new development will not occur in the 2000s
unless warranted by real demand. Already in some markets the demand
for apartments has exceeded supply and new construction has begun at
a reasonable pace.
Opportunities for existing real estate that has been written to
current value de-capitalized to produce current acceptable return
will benefit from increased demand and restricted new supply. New
development that is warranted by measurable, existing product demand
can be financed with a reasonable equity contribution by the
borrower. The lack of ruinous competition from lenders too eager to
make real estate loans will allow reasonable loan structuring.
Financing the purchase of de-capitalized existing real estate for
new owners can be an excellent source of real estate loans for
commercial banks.
As real estate is stabilized by a balance of demand and supply, the
speed and strength of the recovery will be determined by economic
factors and their effect on demand in the 2000s. Banks with the
capacity and willingness to take on new real estate loans should
experience some of the safest and most productive lending done in
the last quarter century. Remembering the lessons of the past and
returning to the basics of good real estate and good real estate
lending will be the key to real estate banking in the future.
Article Source:
http://www.content.onlypunjab.com
Chad Mayes is the creator of
www.CEMLending.com a resource which provides commercial
mortgage loan financing and hard money lending options. This article
is copyright of
www.CEMLending.com. This article
may be reproduced as long as author's name and all links remain
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