The prognosis for the capital markets: steady, despite the rocky economic outlook. “Looking at where things were a year ago, we don't feel quite as comfortable as we did,” said Gerald Cohen, director of the real estate capital markets group for Ernst & Young Assurance and Advisory Business Services, New York. Cohen's remarks came during a capital markets roundtable sponsored by Columbia University and National Real Estate Investor.

Even with his cautious attitude, Cohen said, “real estate markets are strong, capital is plentiful, standards are fair and fairly strict, with a cap of sensibility on what's been developed.”

The shaky economy was an overriding topic at the roundtable, but most of the panelists agreed that the disciplined lending attitudes have kept the capital markets focused and in a fairly stabilized position. “We will rise and flow with whatever happens in general,” echoed Kevin Haggerty, executive managing director at Insignia Capital Advisors, New York.

Richard Lieb, managing director of New York-based Goldman, Sachs & Co., predicted a soft landing for real estate. Lieb believes the information flowing out of the public markets, which can be brutal, will save real estate from the perils of overbuilding and oversupply that plagued the industry during the early 1990s.

Some property types are poised to ride out the economic slowdown, while others are showing certain signs of weakness.

Jeffrey Barclay, managing director for Clarion Partners, New York, said that the suburban office markets are overbuilt, while apartments and industrial centers show potential for growth. However, Barclay wasn't bullish about retail at all. “Retail seems to be dead in the water. Investors are worried every tenant will go bankrupt,” he said.

Factors at work

Tightening lending standards are one reason that the capital markets are holding steady. “We think it's going to be a tough year to place debt,” said Alice Connell, managing director/group leader of TIAA College Retirement Equities Fund, New York. She said banks are tightening lending standards across the board in all industries and real estate sectors will definitely feel the pinch. “REITs will find themselves capital-strained,” she said.

Bank consolidation has played a significant role in the availability of capital, said Patricia Goldstein, principal at Citadel Realty Group, New York. This consolidation, in turn, has affected the REIT business, Goldstein said. “There aren't enough players in the game for big transactions on the REIT side.”

Even with the pressures of the economy, real estate investors have raised the bar for expected returns, according to John Brady, managing director of Merrill Lynch, New York. “You are beginning to see pressure on expectations as investment returns reach as high as 20%. It's hard to grow beyond that level.”

Although the economy is in a slump, real estate is in a state of equilibrium, which has enabled the capital markets to remain balanced, Cohen explained. “Government has typically reacted to situations that require some relief,” according to Cohen. “I don't think there's an outlet in real estate that needs fixing.”

Columbia Roundtable Participants

Jeffrey Barclay
Managing Director

Clarion Partners

John Brady
Managing Director

Merrill Lynch

Michael Buckley (Moderator)
Director

Columbia University
Real Estate Development Program

Gerald Cohen
Director

Ernst & Young Assurance and Advisory
Business Services

Alice Connell
Managing Director/Group Leader

TIAA College Retirement Equities Fund

Patricia Goldstein
Principal

Citadel Realty Group

Christian Halabi
Managing Director

Zurich Structured Finance

Kevin Haggerty
Executive Managing Director

Insignia Capital Advisors

Woody Heller
Managing Director

Jones Lang LaSalle

Richard Lieb
Managing Director

Goldman, Sachs & Co.

Benjamin McGrath
Chief Financial Officer

Edward J. Minskoff Equities