As the Federal Reserve increasingly put the brakes on an economy that was seemingly beginning to overheat, inadvertent victims of the strategy were the real estate capital markets. By raising interest rates to fight suspected inflationary trends, the Feds managed to squeeze down a securitization market that was heading for another record year.

High interest rates will continue through the first part of 1995, which is expected to slow the amount of Wall Street capital coming into real estate, but the improving performance of almost all commercial real estate sectors will attract other sources of capital as well as a wide spectrum of investors.

The Feds began raising interest rates in February 1994, and by early autumn the rampaging equity securitization markets, as represented by real estate investment trusts, skidded sharply to a halt. October marked the first month since March 1993 in which there were no REIT initial public offerings. Two years ago, a record $17 billion was raised as 50 new REITs came to market. Through the first 10 months of 1994, 40 new REITs raised only $6.5 billion.

On the debt side, commercial mortgage-backed securities should tally a record $22 billion in business in 1994. However, there might be some leveling off in 1995.

While there won't be the same level of Wall Street deal making that was done in 1994, especially as banks, insurance companies and pension plans come back into the real estate business, John D'Elisa, a managing partner at Harbour-Brookstone Capital Group of Hamden, Conn., suggests Wall Street will step up in areas where it feels it can be more competitive. "Wall Street will stay in the business by diversifying the type of products, like mobile homes, warehouses and hotels, that it is willing to securitize."

Diversification will also occur in the conduit business, D'Elisa says.

The conduit programs, where individual loans are generated for the purpose of securitization, were supposed to be a major part of the CMBS business in 1994, but interest rates knocked them flat.

In the first quarter of 1994, the volume of conduits hit $1.007 billion, or 27.1% of the total CMBS market. But, as Commercial Mortgage Alert, a newsletter published by Harrison Scott Publications, Newark, N.J., reports, the conduit business dropped to just three deals in the second quarter with a volume of $260.2 million or 3.6% of the market, and two deals in the third quarter valued at $304.6 million, or 6.1% of the market.

The problem with conduits has been rising interest rates, which lessened the spreads between safe Trasury securities and riskier CMBS. In addition, for conduits to work smoothly, mortgages have to be sold at a discount, which is difficult in a rising interest rate climate.

"Interest rates have changed the ballgame," says Ben Lambert, chairman and chief executive officer of Eastdil Realty in New York.

Another problem is overly aggressive underwriting, where the conduit is overleveraged in one particular property sector, according to Robert Schneiderman, executive vice president and chief operating officer for Parallel Capital, New York, which is part of the Parallel-ContiMAP national lending program. He believes many conduit players thought that the multifiamily sector was the end-all-and-be-all sector to finance. While Parallel financed $150 million in 1994, mostly in multifamily deals, the ultimate plan was to diversify into several different property sectors, which Parallel did toward the end of the year, by introducing a full line of health care-related lending programs for congregate care, assisted living and skilled nursing properties.

Parallel's overall lending goal for 1995 is $300 million, double last year's volume, with an interest in most all commercial real estate, including office and industrial, but with a particular interest in anchored and unanchored retail centers, which Schneiderman notes are popular property types with several lenders.

He cautions that those conduits unable to diversify their product types will be among the ranks that are thinned out. He hopes that after a period of maturation and attrition the surviving conduits will be albe to establish a solid reputation as a reliable option amongst other forms of institutional lending.

A recent report by Nomura Securities International Inc., New York, finds that at current spreads, "CMBS are still cheaper than other comparably rated fixed-income securities.... Even though fixed-income issuance in general is expected to be low in 1995, CMBS will continue to grow." Nomura projects $23 billion to $25 billion in total CMBS issuance for 1995.

Wall Street, through its various securitization mechanisms, dominated real estate capital markets for the past two years and will continue to do so, but it will be challenged by new sources of wealth. "Private equity capital markets will be picking up a good portion of the momentum," says Robert Davis, managing director of Arthur Andersen's Real Estate Capital Markets Group.

Henry Haskell, vice president of Kennedy Lending, a Hackensack, N.J.-based private hardmoney lender, expects 1995 to signal a return to more conventional deals, since the FDIC and RTC deals have become fewer and farther between. Kennedy provides financing for most any commercial properties, including hotels, which Haskell says may be a bad word to some lenders, but not to him. Kennedy provided $30 million in overall financing for 1994 with plans to exceed $50 million in 1995, according to Haskell.

Pension funds come on strong

One source of private equity that appears will be very active in 1995 is pension plans. As Douglas Tibbetts, president and chief operating officer of Equitable Real Estate Investment Management Inc., Atlanta, notes, pension plans are back in full force in the equity markets.

Pension plans returned to real estate on the expectation of improved performances, but also because allocations at some pension plans are below goals. "If you look at pension plan allocations to real estate, it really didn't grow at all from 1990 to 1994," says Joe Hanauer, chairman of San Francisco-based Grubb & Ellis Co. If a pension plan targeted 8% to real estate, it is probably only at 4%, Hanauer explains. Considering the combination of improving equity market, additional contributions and reduced evaluations on real estate, pension plan allocations were headed in the reverse direction.

Since nominal property values are below where they were in 1986, real estate is a tremendous bargain, says James O'Keefe, chief executive officer of Aetna Realty Investors Inc. in Hartford, Conn. "It is the right time for pension plans to come in and increase their allocations. There was strong investment flow from pension plans in 1994 and that will continue in 1995."

"Tons of money will be changing hands in 1995," says Alan Kessler, president of Commercial Developments International/East (CDI), an office/mixeduse development and investment firm. "There are billions of dollars of pools of capital in search of prime real estate. Institutions that still own properties will be bringing the best of them to market in the upcoming year.

"At this point, institutions own either quality properties in which they've invested vast amounts of money to boost values, or plain and simple, they own junk," he says. "We can expect prices for the quality products to be bid up substantially, since there's a limited supply. Competition will be fierce."

Another source making a return to the market is offshore financing, according to Howard M. Milner, president and CEO of Howard M. Milner & Associates, North Hollywood, Calif. Milner has found that some lenders, such as the "Swiss Trusts," are more than ever in demand with his firm being inundated by all types of loan requests, ranging from $8 million to $300 million.

Actually, the best time to get back into real estate probably was two years ago when most markets finally hit bottom. Last year was the transition year as operating performances improved and investors started to return in a big way. "Some of our companies had their best year in several years," says Stephen Jaggard, president and chief executive officer of ONCOR International in Houston. "We are definitely in a comeback situation."

Number of transactions move up

Jaggard says ONCOR's transaction business was "very busy" in 1994, and he thinks it will be even busier in 1995. "I talked with a number of large holders of inventories and they have major plans for '95 in terms of what they want to do, either through disposition or acquisition."

All this activity, however, might be obscuring some lingering weaknesses in the real estate market. John Dowling, an executive vice president with Cushman & Wakefield in New York, says the city rented more space in the first three quarters of 1994 than it ever has before, but there is still more space being put on the market than being absorbed as companies cut back jobs and some firms relocate to suburban areas. In addition, he adds, "the difficulty is, there are lots of transactions, a lot of moving around, but rents are still not at the dollar amount required to justify new construction."

Some observers suggest 1995 could be the year rental rates finally begin to move up, especially in lagging asset classes like office. "We are going to see net effective rates plateauing and then gradually starting to increase," says Steve Stratton, executive vice president with Chicago-based Tanguay-Burke-Stratton Comprehensive Real Estate Services. Unfortunately, Stratton says, it has taken the country five years to hit bottom so the climb back will be gradual. "We are at the point where there is no longer free rent in the market, but the rates are still very low." By the end of 1995, as the few remaining large blocks are absorbed, the smaller deals will shift to higher rent levels.

As old leases continue to roll over, many businesses will renew for smaller space or move for new, more efficient space plans, according to Anthony E. Malkin, president of W&M Properties Inc., a New York-based management firm with a portfolio of 1.9 million sq. ft. worth of office space, 2,195 apartment units and 65,700 sq. ft. in retail space.

Some sectors are overheated

For the past two years, two of the hottest sectors of the commercial real estate market were industrial properties and apartments, but Equitable's Tibbetts says both those segments probably overheated. "We think 1995 will be the year where the best buys will be in the office and hotel sectors."

One good sign for offices and hotels is that they are playing bigger roles in the CMBS market. "Hotel and office properties are becoming more viable as collateral for securitized debt," says Carl Kane, managing director for Kenneth Leventhal & Co. in New York. For example, in the first half of 1994, office buildings accounted for $774 million of CMBS transactions, up from $240 million in the same period the year before.

Andy Thomas, executive vice president of business development for E.Q. Services, believes CMBS will be a significant source of financing for the next several years. E.Q. Services is an Atlantabased independent affiliate of Equitable Real Estate Investment Management Inc. and is a commercial and multifamily mortgage and asset management services organization with a portfolio of more than 20,000 performing and non-performing loan assets with an estimated value in excess of $17 billion.

Thomas notes that the number of distressed sellers of non-performing loans is dwindling, while the current owners of mortgage loans are more fundamentally stable and have a capital base to deal with problems better than the thrifts of the early 1990s.

As a result, E.Q. Services expects to be offering more mortgage investment services and drawing in more mortgage investors, such as pension funds, by working with Equitable Real Estate Investment and Column Financial, an entity jointly owned by Equitable Real Estate and New York-based Donaldson Lufkin & Jenrette, another Equitable unit.

The L&B Group, which invests in real estate for its pension fund and institutional clients and has 80 properties valued in excess of $3.5 billion in its portfolio, plans to invest substantially more this year than last. "In 1994, we acquired a total of $90 million in new properties," says Daniel J. Plumlee, executive vice president and chief operating officer for Dallas-based L&B. "Right now, we have commitments to acquire $370 million in new properties with closings scheduled throughout the first quarter of this year. This consists of retail, office and industrial properties that are in the pipeline today. Our total acquisition goal for 1995 is in the range of $450 million to $500 million."

Richard C. Scott, president of Stamford, Conn.-based MONY Real Estate Investment Management and ARES Inc., Mutual of New York's real estate services company, says the market has bottomed out and is improving, but "leasing has been absolute trench warfare for the past four years." And even with an improved market and somewhat higher rental rates in 1995, competitiveness "will remain intense," he says.

ARES, which has approximately 20 million sq. ft. of MONY-owned real estate under management, plans to add another 3 million sq. ft. in 1995, as well as begin to expand into the third-party management arena.

According to the National Real Estate Index's National Market Overview, published by the Liquidity Financial Group, Emeryville, Calif., for the first time in two years, the office and industrial sectors have assumed the mantle of leadership in the real estate recovery, with high-quality CBD office and light industrial properties rising in value 1.9% and 1.6%, respectively, in third quarter 1994.

How well real estate will perform in the future hinges on what comes out of Congress in the next couple of months, according to Nathan Isikoff, chairman of Washington, D.C.-based Carey Winston. He believes that unless there are tax incentives or some kind of aid to spur new business growth, which will in turn create demand for space, the economy will be unable to greatly improve.

Sally Gordon, vice president of real estate research for First Boston, New York, cautions that "expectations regarding inflation or interest rates need not drive real estate investment decisions. Instead, the time to invest in commercial real estate is at the bottom of the real estate cycle, which many believe has occurred in most markets."

"In a rising inflation environment," she adds, "expenses attached to commercial real estate can adjust rather quickly, even in real time. The capacity to adjust revenues in tandem, however, can be limited by a variety of variables. Particularly in markets that are soft or only barely stabilizing, landlords/owners might be pleased to have space occupied at all and have only limited ability to raise rents. In this scenario, margins are squeezed since costs can rise faster and/or more steeply than revenues."

The one asset class experiencing a lot of new construction is retail, but only in certain categories of shopping centers. "There are no malls being built and no small shopping centers," says ONCOR's Jaggard. "So the construction that is going on is just in power centers and community-neighborhood shopping centers."

Retail enjoys some development activity

While there is relatively no new mall development to speak of at present, last year Chicago-based Homart completed the development of the first new regional mall developed in the Houston market in the past 10 years, The Woodlands Mall, in October. As of mid-December 1994, the 1 million sq. ft. center, jointly developed by The Woodlands Corp. and Homart, was 95% leased with Dillard's, Foley's, Sears and Mervyns as anchor tenants.

In October, Homart also completed the redevelopment of the Natick Mall, which included doubling the size of the Natick, Mass., property, originally built in 1966, to 1.2 million sq. ft.

Financing is now readily available for the "right" shopping center, according to Arthur Fefferman, president of AFC Realty Capital, a New York-based real estate investment banking firm. "Our lenders are demanding shopping center investments, and we're actively seeking to originate such deals," he says. Fefferman says his clients prefer power centers, occupying between 200,000 and 500,000 sq. ft.; community centers; and neighborhood centers, ranging in size from 50,000 to 150,000 sq. ft.

Norman Kranzdorf, president and CEO of Kranzco Realty Trust, Conshohocken, Pa., believes major growth will come from strip shopping centers because their supermarkets and pharmacies supply basic goods and convenience items, and consumers visit them more than twice as often as they do regular malls. Kranzco, which owns and operates approximately 4.9 million sq. ft. in 33 shopping centers in Connecticut, Maryland, New Jersey, New York, Pennsylvania and Rhode Island, plans to continue with its strategy of acquiring more neighborhood and community shopping centers in good locations.

In August 1994, Kranzco completed a $3.2 million renovation of its Mall at Cross County in Yonkers, N.Y. In addition to increasing the property by 6,000 sq. ft., the REIT was able to increase the occupancy rate to 95%, compared with the 79% rate at the time of Kranzco's acquisition.

On the investment side, malls were the target of a number of investors last year, in particular the REITs, but the growth of the power centers probably won't be of help to the performance of the big regional malls.

The continued large development of category killers being developed in power centers will put pressure on the malls, says Aetna's O'Keefe. "There are only so many sales dollars out there. If more and more of those sales dollars get funneled into the power centers, then there are less sales dollars left for the mall stores."

Retail sales through the first nine months of 1994 improved by 6.3% over the previous year, but there were year-to-year declines in the apparel and accessory categories -- mainstays of shopping malls.

"In terms of upside vs. downside, malls are the major issue for retail investors," O'Keefe says. "Most people recognize that you have to be very selective in what price points you are looking for and the mix of stores that dominate the center, because rents can only go up if sales go up."

Healing process begins for offices

Downtrodden for years, the national office market has slowly improved. National office vacancies fell to 14.2% for central business districts and 13.7% for suburban areas. But not all is equal, according to Julien J. Studley Inc. Chicago boasts a downtown vacancy rate of 18.5%, but the market is still soft as rental rates declined from last year. The same holds true for Los Angeles, which is suffering from a 23.2% downtown vacancy rate. For both Chicago and Los Angeles, however, the suburban markets have improved. Houston still has a 20.5% vacancy rate but rental rates have improved slightly over the last year. While in New York, the vacancy rate is a decent 15.1%, with some upward movement in rental rates.

CDI's Kessler is bullish on Houston, Dallas, Orlando, Fla., the northern submarkets of Atlanta and Washington, D.C., in terms of areas for acquisition. He believes these areas have economies that are stable or recovering, making them ripe for acquisition or development of office buildings.

Cities like Boston and San Francisco --"24-hour cities"--as described by Gary Beban, president of Los Angeles-based CB Commercial Real Estate Group, are enjoying lower vacancies as well as higher rent levels and are attracting capital and interested institutional investors.

Beban says that the office sector has moved past the sublease opportunities and is starting to experience, in general in most markets, positive absorption, be it through lesser concessions or higher rents.

"Office buildings will be hot in 1995 and 1996," predicts Hugh Kelly, director of Economic Research for Landauer Real Estate Counselors. "If net absorption continues to outrun construction, as it is likely, there is a high probability of success for those acquiring quality assets in 1995." Still, office buildings are not for the fainthearted as total returns for the asset class over the past four years have been in the negative.

According to Thomas Q. Bakke, senior vice president-marketing and leasing for Chicago-based Equity Office Properties Inc., several urban centers continue to prosper because they offer comprehensive amenities, a variety of residential options and are accessible by public transportation, such as San Francisco.

"Over the next two years," Bakke says, "more than 1 million sq. ft. of space is becoming available as three major tenants downsize, leave downtown or move into corporate-owned facilities. In spite of this abundance of vacant space, investment activity is high." He notes that Equity acquired the 1.4 million sq. ft. One Market.

In downtown Chicago, Bakke says, several large transactions in 1994 helped restore balance to the Class-A office market. One North Franklin signed leases totaling 300,000 sq. ft., bringing the building from 13% to 85% leased.

While Class-A buildings in Chicago are starting to see vacancy rates fall, in some instances it's a matter of Class-B and Class-C tenants taking the opportunity in a down market to move up into Class-A space, according to Van L. Pell, executive vice president and COO of Chicago-based Miglin-Beitler, a management firm which oversees 15 million sq. ft. in Chicago and Milwaukee.

Pell predicts that the potential number of downsizing corporations will negate any absorption the Chicago market may experience in 1995, while the service sector continues to see substantial job growth in the suburbs. He notes that the downtown area of New York is also being hurt by downsizing and consolidation of companies, citing Paine Webber's acquisition of Kidder Peabody as one example.

According to a recent report from the Washington, D.C., office of CB Commercial, the new 104th Congress, with its emphasis on downsizing government, will delay the long-awaited recovery of Washington, D.C.'s leasing activity and absorption, as government agencies and the private companies that serve them put off plans for office space expansion. The study also predicts that Class-A institutional buildings, currently with a vacancy rate of less than 5%, will see rent growth, while Class-B and -C will have to aggressively compete for tenants and renovation capital.

Investors open wallets for hotels

"A lot of people have looked to the hotel market as the place to make very good buys," observes Eastdil's Lambert. "They are buying these things at very far below replacement costs and can project where room rates will be because no one is counting on much new development." In 1994, Eastdil arranged the sale of the $130 million Boca Raton Hotel and Resort and the $202 million Helmsley Palace in New York. It also advised Hilton Hotels on the acquisition of the $55 million Hyatt Regency Waikoloa.

So many acquisitive eyes are turning to hotels because the industry's operating performance has improved significantly. Year-end projections by Arthur Andersen show industry revenue at $64.8 billion, a 5% increase over the year before. And, Roger Cline, worldwide director of Arthur Andersen's Hospitality Consulting Services, says revenues should continue to increase to $67.9 billion in 1995, while profit margins which climbed 5.4% in 1994 should jump 7.5% this year.

About the only shadow on the horizon for hotels is interest rates. "Restructured real estate debt and lower interest rates have had the biggest impact on hotel profitability," Cline says. "Restructuring of hotel assets is expected to continue in 1995, but gains in profitability due to further debt restructuring may well be offset by increases in interest rates, which will drive up fixed charges."

According to David Simon, president and CEO of Fairfield, N.J.-based Prime Hospitality Corp.: "Changes in federal tax laws have discouraged hotel companies from the characteristic speculative development of the 1980s, causing them to focus on operating their properties for profitability rather than as a tax advantage. And, of course, classic economics apply: supply and demand is on a trend of stabilization. With demand on the rise, the industry is enjoying a 'sellers' market. Properties across the industry segment are again able to command appropriate rates."

Prime, which owns or manages 86 hotels throughout the United States under its proprietary trade names Wellesley Inns and AmeriSuites, as well as under several franchise agreements, is in the midst of implementing a three-year, $200 million development plan that will expand its portfolio by 50%.

"For now, limited-service and all-suites segments will continue to deliver a faster return on investment than full-service properties," says Simon. "As an example, Prime's proprietary limited-service brands, Wellesley Inns and AmeriSuites, show stronger profit as a percentage of revenue than the national average. The limitedservice all-suites brand, in fact, delivers a 50% profit margin -- 21% better than the average."

According to Tom Keltner, senior vice president of development for Promus Hotels, Memphis, the number of limited-service hotels will continue to increase in the future because of the profit potential. Limited-service properties cost less to build than full-service and incur fewer add-on expenses.

"The future for full-service, upscale hotels is bright as well," Keltner adds. "During the hotel industry slump, many properties in this segment were inherited by reluctant owners through bankruptcy or foreclosure. Now, however, these hotels are being purchased by developers actively seeking full-service, upscale properties as the hotel industry continues to improve."

Promus, which presently has 438 Hampton Inns, 107 Embassy Suites and 26 Homewood Suites properties, plans to open 86 hotels systemwide among its brands during 1995, including 64 Hampton Inns, the first six Hampton Inn & Suites, 10 Homewood Suites and six Embassy Suites.

In other new development, Des Plaines, Ill.-based Amerihost Properties, which from 1987 to 1993 built a total of 17 hotels, was able to start construction on 15 hotels, ranging in size from 60 to 100 rooms, just in 1994 alone, at development costs of around $36 million.

"We feel that 1994 was just the beginning of a very positive turnaround year in the hotel industry," says Michael P. Holtz, Amerihost's president and CEO, "especially in the fast-growing limitedservice segment." He plans to break ground on 20 more hotels in 1995, the majority of which are to be the Amerihost Inn brand.

Not all U.S. hotel activity is restricted to this country, though. In 1994, Best Western International achieved two milestones in its globa growth. First, the Best Western Airport East in Atlanta became the 2,000th property in the North American system, while internationally Best Western expanded into its 60th country, as compared to being in 50 countries in 1993. The hospitality firm's goal, established a couple of years ago, was to have properties in 65 countries by the year 2000, a target they will actually hit this year.

In December, Best Western established, and hopes to strengthen in 1995, a strategic alliance with Warner Bros., an agreement in which Warner waives its promotion licensing fees for Best Western to use select movie logos and images in advertising and promotions.

Industrial space quite in demand

Investors looking for bargains in industrial properties may be a little late. Due to a torrid year in 1994, the bargains seem to be played out and prices have already begun to rise. This doesn't necessarily mean there's anything wrong with industrial. To the contrary, smart investors saw the changing fortunes in the asset class and got in early. The attraction has been and will continue to be strengthening demand combined with construction levels still only introducing a modest amount of new competition.

CB Commercial's Beban describes the industrial market as the most stabilized of all the property sectors, as well as the preferred property for institutional investors.

With the economy improving and employment increasing, Corporate America is going to need more space. "If you look at plant capacity utilization figures," says Grubb & Ellis' Hanauer, "industrial capacity is up to about 85%, which is considered full usage and that creates new demand for factories and distribution facilities."

National industrial vacancy rates are now in the 10.4% range, which is why in some selected markets like Atlanta, Portland and Sacramento there has actually been speculative building going on. However, most of the national expansion is still taking the form of build-to-suit projects.

According to Hanauer, the national average lease rates for warehouse/manufacturing space increased 4.2% in the third quarter of 1994, with the average lease rate currently ranging from $2.75 to $5.75.

Wall Street still likes multifamily

Without a doubt multifamily housing has been the hot button for real estate investors over the past three years. It was the first asset class to tank as the nowfading real estate recession first hit the country and it was the first asset class to show substantial improvement.

"It's fair to say over the last couple of years, multifamily housing has been the darling of the investment sector in real estate," comments Jonathan Kempner, president of National Multi Housing Council in Washington, D.C.

It has also been the object of desire to Wall Street, which has over the past 22 months raised $6.3 billion for 35 new apartment REITs. A lot of that went for acquisitions as almost 100,000 apartment units were bought by multifamily REITs in 1994. As a result prices were driven up, but on the positive side distortions have been taken out of the market.

"1994 was a very solid year for the apartment industry," Kempner says. "For 1995, we see exactly the same as the industry has settled down into a healthy equilibrium."

When 1994 started out, Seattle-based GFS/Northstar was managing 42,000 multifamily units with plans to expand its fee-based management business. According to Stan Harrelson, president, after a series of acquisitions, the most recent this past December with the acquisition of Houston-based Sovereign National Management and its 26,000 units as well as 6 million sq. ft. in commercial space under management, GFS has changed its name to Pinnacle Realty Management Co. with a total of 80,000 multifamily units and 7.5 million sq. ft. of commercial space.

Harrelson says that while they were able to nearly double their management portfolio during 1994, they still hope to grow another 25% in 1995. He looks at his present situation as a unique opportunity to grow as a service provider and thrive in new areas, such as financing and brokerage of real estate.

"Although the market for multifamily housing recently has become very competitive for both private and public investors," says Larry E. Wright, president of The MIG Cos., West Palm Beach, Fla., "I believe apartments will continue to provide good opportunities during 1995 because of the short supply of existing inventory and lack of excessive construction."

Q&A

New Institute Plans To Streamline Multifamily Financing

Matt Slepin is the executive director of the Multifamily Housing Institute, a new non-profit organization recently formed and based in Washington, D.C. Because of the institute's mission of datagathering to answer the widely felt need for standardization of terminology and documentation in the multifamily finance field, NREI asked Slepin for his assessment of the future of the multifamily industry, of what the MHI's role will be in shaping it, and how both government and the private owner will be involved.

The institute's members include owners, property managers, Fannie Mae and Freddie Mac, mortgage bankers and other agencies involved in multifamily housing. The institute's next annual meeting will be held in Washington, D.C., on March 29, 1995. For more information contact Matt Slepin or Katherine Bingler at (202) 857-1142.

Q. What is the institute's mission?

A. The institute was founded to foster a liquid, stable and efficient market for debt and equity capital for multifamily housing. The institute is an industry response to the blow that the combination of the real estate recession, credit crunch and changes in federal-assisted housing policy gave to the multifamily industry. As we moved into the dark days, Wall Street roared into multifamily financing. Our job is to work with the Wall Street houses, traditional secondary market players (Fannie Mae, Freddie Mac) and the private developers, property managers and mortgage bankers to mature these financing options, particularly for affordable housing deals. The institute is developing a data base to provide sound information on multifamily investments and to establish a forum through which the industry can work together to standardize documentation, terminology, chart of accounts and other activities to help streamline multifamily transactions.

Q. What major trends in the multifamily industry do you see supporting this goal?

A. Several major trends have transformed the multifamily industry, particularly the financial components. First is the increasing, really I should say maturing, role of the capital markets (Wall Street and Fannie Mae/Freddie Mac) in multifamily finance. Second is the increasing concentration of ownership and management within the industry. With this new concentration of capital, ownership and management comes the third change, which is an increasing need for sophisticated reporting and tracking in order to report to investors and regulators. Fourth, the enormous changes at HUD, I believe, will reduce the distinction between "affordable" and other multifamily properties. Finally, it will become increasingly difficult to put together multifamily deals in tough neighborhoods or those with high percentages of lower-income families, and these deals will become increasingly dominated by the non-profit sector. These trends underscore the need for the institute.

Q. Expand, if you will, on the impact of the proposed changes at HUD and their impact on the multifamily industry generally.

A. The biggest long-term impact may be to reduce the distinction between "affordable housing" and the rest of multifamily. Today a small group of multifamily owners and lenders see themselves as affordable housing providers. In actuality, multifamily housing is affordable housing. When low-income tenants receive vouchers instead of project-based rental assistance, many will shop for the best value. Owners and managers who do not see themselves in the affordable housing business today should get ready for a new world.

We'll wait and see how the proposed privatization of FHA's multifamily activities plays out. In terms of new business, privatizing FHA legislates what has already happened. However, the fallout from the existing FHA stock may be overwhelming and result in a huge RTC-like sale of HUD multifamily inventory. How the government works through these issues, and the impact on the private sector, spells both pain and opportunity.

Q. What is the institute's relationship with the National Multi Housing Council, the National Apartment Association and other D.C.-based real estate associations?

A. The institute was founded by 34 organizations, including the National Multi Housing Council, the Mortgage Bankers Association, the National Association of Home Builders, the National Housing and Rehabilitation Association and the National Council of State Housing Agencies -- to perform the technical role that we've been discussing. These organizations focus on lobbying and educational programs. The institute was founded as a neutral, non-lobbying organization in which these organizations and their diverse constituents can work together to provide data resources and a forum for industry standardization.

Q. Tell us more about the data base. How will you get companies to share their proprietary business information?

A. The data base will track -- hopefully on a quarterly basis -- property and investment-level (mortgage and equity) information on multifamily properties nationwide. The institute will publish quarterly indexes summarizing various trends in multifamily financing and will make aggregated information from the data base available to its members and the industry in general. Because any user would be able to view others' properties only on an aggregated basis, confidentiality is an important but solvable concern. Imagine the value to a company with 5,000 units (or 10,000 units or 25,000 units) to be able to benchmark their portfolio or individual properties against a data base with hundreds of thousands of units.

Q. The data base sounds like a huge project. How will you get it done and when will it be available to the public?

A. The institute hired a Big Six firm, Price Waterhouse, to help model the data base. PW is putting together a prototype of the data base right now, which will show the technical feasibility of combining data from half a dozen different sources. We plan to implement the first phase of the data base, which would include data from 10 to 30 different sources (large owners, life insurance companies, banks, REITs, tax credit providers, non-profits, Fannie Mae and Freddie Mac), over the summer and fall of this year with release of initial reports by December. By ramping up its development, we plan to limit the upfront cost of the data base and develop increased capabilities (online access, capturing information on most properties) on a pay-as-you-go basis.

Q. Is the data base and the institute mainly an effort for the affordable multifamily sector?

A. No, as I said before, we are all in the affordable housing business. The institute was formed to provide a data base and industry forum in which all players in our industry -- life insurance companies, REITs, pension advisers who are traditionally in the "A"-grade, "investmentquality" market -- work together with the traditional affordable or government-oriented participants. After all, we are all finding debt and equity financing through many of the same sources, adjusted by amount and spread according to perceived risk. Our job through the data base is to help quantify that risk for different product types and to reach agreement on common practices so that all deals can come into a lender or purchaser in some routine formats.

Q. How is the institute supported and how will you pay for the data base?

A. The institute is a currently non-profit organization funded today entirely by membership dues. Ultimately, a large part of the institute's work will be supported by data base sales, but, until then, we are dependent on the vision of our founding members. The data base itself will be an expensive venture and we will look for major market players to make a capital investment to start the data base commensurate with the benefit that the data base will provide them over time.