Commercial realty past its prime

May 09, 1991|By Edward Gunts

Although the end of the recession may be near, the prospects for a rebound in the depressed commercial real estate market are less certain -- and may be for some time to come.

Even when the industry does start to regain strength, certain segments of the market will come back long before others, and the business will never return to what it was, according to experts who spoke at two recent real estate symposiums in Baltimore.

"I think it's much more than a cycle. It's more on the nature of an earthquake," said Morton P. Fisher Jr., an attorney who spoke yesterday at the Commercial/Industrial Real Estate Expo sponsored by the Greater Baltimore Board of Realtors at the Convention Center. "It's clear we're not going to finance real estate in the way we have" in the past.

"Real estate values are heading down and will continue to head down for some time," said Robert Frank, managing director of the Real Estate Securities Research Group of Alex. Brown & Sons and another Expo speaker. "We've pumped far too much money into commercial real estate in the 1980s."

"We're in an era of great uncertainty," said Walter D. Pinkard Jr., president of W. C. Pinkard & Co., sponsor of a symposium held at the Maryland Science Center two weeks ago.

"We're doing business today in ways we never envisioned a few years ago," Mr. Pinkard said. "But we believe significant opportunities exist for those who can take advantage of them."

At both symposiums, the experts said that the speculative developer of the 1980s, who threw up office and retail space and waited for tenants to come along and fill it, is a thing of the past.

They said the developments that have the best chance of getting financed and constructed in the next few years are demand-driven, build-to-suit projects with a high percentage of the space pre-leased, such as the 28-story addition to the IBM building at 100 E. Pratt St.

Some speakers predicted that developers will not be working for themselves in the future as much as they may be working for a fee on behalf of others.

Asset management is one direction in which many developers and brokers are moving, they said, as lending institutions that inherit properties through foreclosure sales seek the services of specialists who can turn around troubled buildings.

"The traditional deal-making developer may be dying, if he is not already dead," Stuart Rienhoff, Pinkard vice president, said two weeks ago. "He has been, or will be, replaced by the asset manager or the workout specialist.

"Based upon our view of the office market today," Mr. Rienhoff continued, "the real estate entrepreneurs of the 1990s will be charged with maximizing existing asset value, turning around troubled properties and building only for specific demand."

Mr. Frank said yesterday that he thinks the real estate market in the 1990s will be driven by what the aging "baby boomers" want, and in many cases that will involve leisure-oriented projects.

Among the developments likely to be in demand, Mr. Frank said, are second homes, restaurants, public storage warehouses for personal use, specialty retail centers, nursing homes and congregate care facilities. In addition, apartments "seem to be attractive and will be the first [segment of the market] to come out of the recession," he said.

Most of the real estate experts said they don't expect commercial construction activity to resume until demand picks up and more of the currently available space is leased, which could take a year or more.

Because many lenders are busy addressing their own financial problems, they say, they are not going to be prepared to fund projects at the rate they have in the past.

One problem with the current real estate market is that new developments must compete for funding with other investments that bring a higher rate of return, said Christian T. Miles, director of real estate finance for Prudential Mortgage Capital Co. Inc.

"Competition for scarce investment resources is heating up," he said. "Real estate is losing some of its distinction as a separate and distinguished investment area."

The skills needed by real estate professionals are changing as well, Mr. Frank said. "To make money in the '70s and '80s you had to be a developer or syndicator, because that's where the money was made.

"We think that the skills you need to go forward in real estate today are acquisition skills and leasing skills," he added. "We don't need any more property."

Although funds are more scarce, certain "niche" projects can still attract the attention of investors, Charles Ewald, vice president of the real estate department of Goldman, Sachs & Co, said.

Examples of projects that still may be financeable, Mr. Ewald said, are certain types of retail projects and warehouses; buildings for tenants that need a special kind of space that is not already available; and developments that take advantage of one-of-a-kind sites, such as the last developable parcel next to an airport.

More conventional office and industrial projects also are likely to receive funding if they have a high degree of pre-leasing, said Louis "Pete" Mathews Jr., a vice president with First National Bank of Maryland.

Generally, office buildings now need to be 50 percent to 80 percent pre-leased "at rates consistent with the market," and warehouse facilities need to be 30 percent to 40 percent preleased before they can obtain financing, Mr. Mathews said.

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