Paving the way for change in the real estate industry NEW YORK - The days of the classic borrower/lendermay be coming to a close. That's what Sam Zell, founder and chairman of the board of Chicago-based Equity Group Investments, told real estate executives recently at the first Reis Annual Client Forum. According to Zell, raising capital for real estate is a more complicated procedure these days due to sheer competition from other industries.
"One phenomenon of the next 10 years will be that real estate developers will find themselves in the position where they must compete for capital," Zell said during his keynote address. Along with Zell, the forum featured speakers from companies such as Fannie Mae, Marcus & Millichap, Lowenstein-Romo Capital and Capital Thinking. The Reis forum was held last month to help the company debut new products, provide insights into the year ahead and create a community among its clients.
Zell reminisced about the days when he could walk into a lending institution and ask for capital and receive low interest rates, no questions asked. One-third of the overall capital available from lenders used to be earmarked for real estate, and now, that number has decreased, Zell explained. Why? The market is changing and real estate borrowers are competing with companies such as Viacom, AT&T or the local grocer.
Information boom For what may be the first time, investors are facing a level playing field. The widespread distribution of information is the instigator, according to Randy Fuchs, senior vice president of Reis.
With the availability of information, banks expect more for their money.institutions are "allocating (money) between industries based on what industries can pay," Zell said. So when you go in to request funds to build that new office building, you'd better already have gathered the necessary information to back up the proposal.
More information increases the difficulty of the deal. Analysts dedicated to writing about the market are prevalent, which behooves borrowers to keep apprised of their projections and predictions.
"We never haddedicated to understanding the overall market, and, more importantly, disseminating this information," Zell said. "The existence of all this information is acting as a governance on our industry."
The information flow changes the landscape of the industry. Actions and intentions change because of the availability of information, Zell explained. "We've never had a real estate market that responds to reality," he said.
Economic slowdown The downturn in the economy has been a big topic of discussion in the real estate industry. Zell had his own take on the issue. "I believe we are in a recession," he said. However, he was quick to point out that his definition would be different than the typical economist's idea of a recession.
He explained that after two quarters with a loss in percentage of overall growth, he sees a recession. He also predicted that the signs of de-accelerated growth would continue through 2001. He explained that this downturn was inevitable due to the unprecedented growth in the economy in recent years.
Part of the economic slowdown can also be attributed to the dot.com fallout, which has proven to real estate developers that it's wise to be cautious when pursuing deals withcompanies, Zell noted.
The high-tech advantage According to Zell, gaining a competitive advantage is possible when a company uses technology such as the Internet. "The Internet is changing our lives and without a doubt our companies," he said. "The benefit of technology is that it's making us more efficient and making us do our jobs better."
Fuchs agreed that technology is important because it would offer companies a competitive advantage by integrating technology solutions with the firm's established processes.
Technology can help a real estate firm find a way to accomplish tasks cheaper, faster and more easily. Real estate companies that aren't embracing technology will be left behind in the long run, Zell said. He went on to predict that competitive advantage from technology advances would cause the number of industry players to shrink while adding stability and profitability to the industry.