The 1970s began with a boom in office development and saw the adoption of the mixed-use concept - both in the urban and suburban areas. The booming REIT market was a major story, especially when it crashed in the mid-1970s due to excess leveraging, high interest rates and lax business practices. As the decade progressed, the economy sagged under the weight of runaway inflation and the impact of the energy crisis.
Another skyscraper boom The early years of the decade saw a decided increase in the development of downtown skyscrapers, riding the wave of optimism and capital from the previous decade. According to the Urban Land Institute, more than 25 buildings taller than 50 stories went up between 1970 and 1974. Some of the high-profile projects completed include: the 110-story World Trade Center towers in New York in 1970 and 1972; 110-story Sears Tower in Chicago in 1974; and the 80-story Standard Oil building in Chicago in 1974.
There was also a considerable amount of larger, non-tower buildings being built. According to ULI, 225 buildings of more than 100,000 sq. ft. went up during the same period. Total office space expanded by more than 120 million sq. ft. New York City was by far the most active CBD, adding more than half of the total, or 61 million sq. ft., of new office space.
Mortgage REITs boom and bust REITs had largely replaced the real estate syndicate as the investment vehicle of choice by the 1970s. Investors rushed into REITs in the early-1970s to participate in the strong market for apartments and condominiums. Assets in REITs ballooned from just more than $1 billion in 1970 to $20 billion at their peak. The pullback was substantial. By the end of the decade, REIT assets had sunk to $7 billion.
Mortgage REITs were all the rage and it was these REITs that led the decline. "REITs were really hammered in the 1970s," remembers Ralph Block, author of Investing in REITs. "From 1968 to 1970 REITs adopted their own version of the Ponzi scheme. Someone would form a construction loan REIT and it would become popular with investors.
"With more equity and leverage the REIT would buy more loans from banks," he continues. "The stocks kept going up and the underlying loans were of increasingly lower quality. This activity coincided with a down cycle in the real estate markets and sharply rising interest rates."
The mortgage REITs were borrowing heavily from short-term money sources and lending for significantly longer durations. The sharp rise in rates put a huge number of loans under water in a short amount of time.
The fallout was striking. By 1974 almost 75% of the loans held by mortgage REITs were non-performing, and burned investors fled the vehicle for limited partnerships.
Apartment market subdued The demand for apartments was strong throughout the decade, but the investment market for these properties did not reach the levels of activity experienced in the office market. Several factors supported healthy demand. Those most likely to rent apartments - the 25-year-old to 34-year-old cohort - were increasing by an average of 1.2 million per year through the decade. (This was confirmed by skyrocketing demand for everything denim - production of the textile doubled from 1973 to 1976.)
Rising interest rates also bolstered demand by keeping many out of the home-buying market. The healthy demand did eventually tighten markets, but that is about as far as the market would advance during this decade.
Investors were bullish on apartments in the opening years of the 1970s. Inflation was heating up and investors felt that real estate was a much more effective hedge against inflation than the flat stock market. This bid up prices for apartments. In fact, prices were rising much faster than rents. The apartment development boom, however, was not to be. A continued rise i n interest rates, loose underwriting standards and the recession of 1974-1975 demolished the mortgage REIT industry, and lenders slammed the doors shut for apartment borrowers.
Mixed-use concept The mixed-use concept was prevalent in many of the most impressive developments of the decade. "In the 1970s we really saw the mixed-use development evolve," says Frank Spink, former head of policy for ULI and now principal of Spink Consultancy.
The combination of several uses for one site was certainly not a unique approach. Developers hoping to squeeze every drop of utility from a site have urged the mixture of office and retail, for example, since the great skyscraper boom of the 1920s. What stood out about the 1970s was the pervasive use of the concept and the gargantuan scope of many of the projects.
One project that illustrates the mixed-use concept was Gerald Hines' development of the Galleria in southwest Houston. The Galleria Shopping Center - the 1.8 million sq. ft. retail element - was completed in 1969 on a 52-acre plot of land outside the CBD. The project also included a 450-room luxury hotel and the 25 Post Oak office building, which were completed by 1973. The shops, office space and hotel rooms were garnished with a private social and athletic club and an Olympic-size ice skating rink. Hines has exported this model to numerous sites across the nation with great success.
The mixed-use mentality was not restricted to mercantile development. The most pronounced exhibition of the mixed-use movement was the many planned communities and Planned Unit Developments (PUDs) that were built in the late-1960s and through the 1970s. As a response to the decline of the inner city and suburban sprawl, developers teamed with city planners and in some cases social scientists, to plan and build self-sufficient communities on the peripheries of urban areas. Most of these developments were concentrated in the expanding Sunbelt region, primarily in the states of Florida, California and Texas.
Gerald Finn, now chairman and CEO of New America International, was at the forefront of the planned community movement unfolding during the 1970s. "The origins of the Planned Unit Development, and planned communities in general, took place in the 1960s," Finn says. "In that time, there were a lot of houses being built, but there were very few true communities going up. Due to zoning, including places to work or shop in residential developments was not possible.
"This led to the cookie-cutter, Levittown-style projects - vast communities with exactly the same size lots," Finn continues. "By 1968, new legislation was put in place to provide the environment for a freer flow of housing types with industrial, retail and school components."
James Rouse developed one of the earliest and most successful communities. Backed by the deep pockets of the Connecticut General Life Insurance Company (CIGNA), Rouse quietly acquired 16,000 acres of farmland in Howard County, Md., between Washington, D.C., and Baltimore, to build Columbia. An excerpt from a ULI publication explains the lengths to which the Rouse team went to provide a self-sustaining community. "They devised such innovations as a prepaid community health plan; a minibus system; shared multipurpose community facilities for worship, recreation and other uses; and a focus on quality education and active community participation." Columbia endured a major financial downturn during the recession of 1974 to 1975 to become a community of 80,000 people. The office and warehouse properties located in Columbia employ almost 50,000.
Like any other successful model, the planned community of Columbia was replicated many times during the 1970s and continues today. Other examples include: Las Colinas, Greenwood and the Woodlands in Texas; Thousand Oaks, Mission Viejo and the Irvine Ranch in California; Tyson's Corner in Virginia; and Woodfield Mall outside of Chicago.
These communities were difficult to reproduce, however. Putting together the financing was a challenge. "During the late-1960s, when Bill Rouse built Columbia and Robert E. Simon built Reston - these were towns," says Finn. "I wanted to scale this model down a bit to create villages."
Finn's vision of smaller planned villages was well received and he and others developed these communities well into the 1970s. "The government was advancing huge loans if you were building PUDs back then."
Finn had developed numerous projects when a far grander ambition struck him. "My idea was to build a car-less community. It was to be planned around a monorail system, and it was the best designed community ever." The plan was not to be, however, as reality and the threat of an economic downturn smacked up against Finn's vision.
The second half of the 1970s was plagued with stagflation - rising prices, low or falling output and high unemployment. Consumer prices spiked by more than 13% in 1979. The late-1970's real estate boom began its bust in October 1979 when Federal Reserve Chairman Paul Volker began increasing the prime-lending rate to better control inflation.