The contenders are jockeying for position, with everyone claiming credit for coining the phrase, Stay alive 'til '95. Consensus is forming around the judgment, "commercial property is back." All the sentiment indicators are risi ng as we hit the midpoint of the '90s. It's quite a change from the past few years.

America's economy began to surge in the fall of 1993, and real estate quickly caught the wave. With construction gear mothballed and rental rates low, factors like new jobs, greater spending power and increased travel almost immediately translated into improved demand for commercial property.

Even as economic anxiety and higher interest rates afflict the bond and stock markets, real estate looks good to investors. After all, one of the characteristics of the asset class is its "negative covariance" with stocks and bonds. This was one of the reasons (but not the leading cause!) that mixed-asset investors shunned real estate as the capital markets moved upward after the 1987 crash. Now, as Wall Street indexes remain flat or drop, commerical property is poised to regain some of its value.

It is worth stating, however, that the road ahead will have bumps and twists. The key questions concern selectivity issues. What is the likely rate of change in real estate prices? What is the potential magnitude of the market shift? Which property types are poised for change? How is the real estate recovery distributed geographically? These issues directed our analysis in the preceding chapters.

For most commercial space users, the opportunity to cut once-in-a-generation deals has passed, and the window of tenant advantage is rapidly closing. Office vacancy rates should be halved by the year 2000, and a doubling of rents is not out of the question. This is the most radical change on the horizon, but one with a very high probability. Market participants should be factoring this into their 1995 strategies.

Real estate securitization will be facing some thorny choices. With the proliferation of securitized product, 1995 shapes up as a year in which the winners and sinners begin to sort themselves out. Some REIT and commercial mortgage-backed securities will undoubtedly be disappointing, but we expect market discipline will tolerate individual problems without tarnishing the securitization process as a whole.

Still, the lessons are clear. Investors must understand the assets and the property markets supporting their anticipated cash flow. More disclosure and deeper analysis will be demanded as securitized investment becomes more widespread.

REITs have thus far sold a story of specialization and local management expertise as the reason for strong performance expectations. We anticipate this will soon begin to change. As competition for high quality product stiffens and prices rapidly escalate, REITs will adopt a portfolio diversification theory. Soon national and mixed-property REITs will begin to compete for investor dollars.

Institutional sellers will continue to clear their books of REO assets. For many, this will be a vindication of a highly professional staff effort to first get control of, and then to rebuild, asset value. Lenders, having inherited thousands of properties with marketing and management problems, recognized that their capital and credibility offered the best strategic vehicle for restoring value. This arduous process, far more complicated than wholesale disposition, will now be bearing fruit.

The stage is set for a resumption of traditional lending activity, provided some relief from excessive regulatory and accounting constraints is implemented. Risk-based capital rules must recognize that losses are more a function of underwriting quality than the identity of entire asset classes. A thorough reform of those rules is in order.

Foreign investment, which flowed more freely in 1994 than in the prior two years, should step up once again. Exchange rate advantages are reinforcing the buying power of many overseas investors. Only the Japanese, burdened by domestic constraints and still digesting their massive investments of the late-'80s, figure to be on the sidelines.

Recovery is a process, not an event. While trends are pointing upward, most markets are still not in balance, nor will they be truly robust for several years. As recovery is under way, the industry should learn the lessons of its recent history. Despite the pleading of financial engineers, the path to health is along the way of equity rather than leverage, attention to fundamentals rather than gee-whiz derivatives. Perhaps the most difficult lesson, as market improvement becomes more pervasive, is to stick to long-term strategies and take gains as they become available, rather than grabbing for the last marginal dollar.

Some of the fun has returned to real estate. We expect to see the professionals sharpening their batting averages in the coming year.