A decade has passed since the last great real estate recession. But today, as the national economy drifts deeper and deeper into a severe slowdown, the real estate sector remains surprisingly buoyant. While not exactly at full strength, real estate nonetheless has seen little of the massive overbuilding of the late 1980s and early 1990s, a trend that caused prices to plummet and brought about the collapse of the U.S. thrift industry.
The difference between the two decades has a lot to do with the movement of institutional real estate into public sector ownership either through REITs or on the debt side in the form of mortgage-backed securities. Not only are these capital formats heavily regulated, the amount of information and analysis pertaining to institutionally owned property and property markets has really affected all forms and sectors of real estate investment — some might say creating an “invisible hand” of governance.
As REITs and public ownership increased, notes Doug Healy, a principal with Lend Lease Real Estate Investments Inc. in Atlanta, expansion coincided with “a significant amount of disclosure, independent investment research and transparency — and with all that comes discipline.”
“The real estate industry has become amazingly more disciplined than I ever thought it would,” adds Ross Smotrich, a REIT analyst at Bear, Stearns & Co. Inc. in New York. “There's better flow of information, greater transparency of deals, leverage levels have been reduced and it has become much more difficult for a management team that is unproven to get access to capital.”
Public market governors
A wide array of what some are calling “public market governors” has seemingly imposed, at least at this point, a discipline over what has always been an investment arena known for wild behavior and huge cycles of boom and bust.
A list of public market governors might include bond analysts, rating agencies, REIT analysts, bank and insurance analysts, the Fed, and state regulators. Some people also include the Internet, because it makes available to anyone with a computer a vast amount of real estate and market information. “Real estate will always be a cyclical business given the nature of lead time and lagging market rents,” says Smotrich. “However, the cycle has tightened over the last couple of years.”
What that means is, the distance between the depth and peak of the market has gotten narrower, says Peter Korpacz, director of PricewaterhouseCooper's Global Strategic Real Estate Research Group. “There is less volatility and that will continue.”
The whole issue in a nutshell, Korpacz adds, is that the combination of FDIC, state regulatory boards, rating agencies, CMBS markets and Wall Street exerts a lot of influence and a lot of discipline on capital formation for real estate. “This doesn't mean there are not some fly-by-the-seat-of-their-pants people out there, but there are fewer of them today than there were 10 years ago,” says Korpacz. “This is an industry that has matured on the research side. Data gathering, analysis and dissemination has gotten very mature and people are using these tools effectively.”
No secrets to keep
There are really no secrets in individual markets today, observes Ray Cirz, a managing director with New York-based Integra Realty Resources. “Back in 1990 it took one year to 24 months for some markets to realize they were way overbuilt and heading south. Now with the availability of data, you know this information quicker.”
Everything is tracked — absorption rates, market rents, property sales and cap rates. “There is certainly more discipline now than there was 10 years ago,” Cirz says. “That's because of the information available and because so much real estate is under common ownership, either in REITs, securitized formats or with large investors.”
Birmingham, Ala.-based Colonial Properties Trust owns more than 100 apartment, office and retail properties throughout the Sunbelt. Today, the company is doing more development than acquisitions, which is what the markets are dictating. “The more information you have, the better educated you are and the better able you are to make an investment that makes sense,” says Lee Robertson, an investor relations vice president.
Although there are still people on the private side building as much as they can, says Robertson, there is certainly greater discipline in public companies.
Maybe even the private side is getting the message, however, because as Robertson notes “we haven't seen the profound peaks and valleys in our markets. There has been much more moderation in these cycles.”
Kelly Sargent is an investor relations vice president at Chattanooga-based CBL & Associates Properties Inc., a shopping center REIT. Not only does she agree with Robertson, she takes the concept of market discipline one step further. “Especially on the Internet, information is so readily available that it has helped investors and today real estate is much more of a stabilized investment.”
Lower returns?
As real estate markets become more efficient, will this result in consistency, but with lower returns? John Roberts, an analyst at Hilliard Lyons in Louisville, Ky., doesn't think so. “Not necessarily lower returns, because returns have to be consistent with current market conditions. What you will see is lower volatility of returns.”
REIT managers can no longer take the risks they took in the past. Simply put, public markets provide a buffer by not allowing REITs to raise capital during periods of overbuilding.
Actually, consistent markets could lead to higher returns, says Jessica Tully, an analyst with Wachovia Securities Inc. in Atlanta. “You do not have as many periods of overbuilding and that is what kills your long term returns.”
People will always be able to exploit individual market changes and not all markets are going to ebb or flow together. “But the fact that potential returns might not be as volatile — that is also true,” observes Randy Fuchs, a senior vice president with Reis Inc. in New York.
“Since market swings are less volatile, you will see a lot more short cycles. I don't even see why we will continue to have these broad bell-shaped troughs and peaks. The swings in the market will be narrower.”
Steve Bergsman is a Mesa, Ariz.-based writer.
SIDEBAR: The Reis report turns to technology
For the past 20 years, the independently minded Reis Reports (now Reis Inc.) has provided institutional real estate investors with a host of market data and analysis. Last year, the company turned to the ’Net to distribute its information.
“The goal of the site is to bring the market data to a broader base of commercial real estate professionals nationwide,” says Randy Fuchs, a senior vice president.
Although there is aggregate information available for free at www.reis.com, the site is really for transaction support, and access to “granular information” does cost. Still, Fuchs notes, “we are one of the most heavily trafficked sites in the investment real estate market.”
What www.reis.com reports is a little more than just historical trends. It also offers econometric forecasts, individual rent comp data and the very popular submarket reports.
Instead of just listing new reports, the stories are categorized for individual markets. “What we do is take several different news feeds and code the stories into their relevant metros,” says Fuchs.
The chief premise? “No commercial real estate professionals give a damn about an individual market unless they have to do a deal there,” Fuchs explains. “Then, they want to know everything. So, we'll code the news for an individual metro and maintain an archive.”
As to real estate sector reports, the company always produced those for the office and apartment markets. But in March, www.reis.com began publishing its own retail real estate reports. “We have been providing retail real estate information to our institutions, but there hasn't generally been anything available to the consumer world and real estate professionals,” says Fuchs.
“Nothing has been available on the web for retail real estate,” Fuchs continues. “But in March, we introduced retail reports for 50 markets with all the submarket trends, forecasts and break-outs on different retail property types.”