Although serious supply-demand imbalances have continued to plague property markets into the 2000s in many areas, the mobility of capital in current sophisticated financial markets is encouraging to property developers. The loss of tax-shelter markets drained a substantial amount of capital from property and, in the short run, had a devastating effect on segments of the industry. However, most experts concur that many of those driven from property development and the true estate finance business were unprepared and ill-suited as investors. In the long term, a return to property development that's grounded in the fundamentals of economics, real demand, and real profits will benefit the industry.

Syndicated ownership of property was introduced in the early 2000s. Because many early investors were hurt by collapsed markets or by tax-law changes, the thought of syndication is currently being placed on more economically sound cash flow-return real estate. This return to sound economic practices may help ensure the continued growth of syndication. Property investment trusts (REITs), which suffered heavily in the true estate recession of the mid-1980s, have recently reappeared being an efficient vehicle for public ownership of real estate. REITs can own and operate property efficiently and raise equity because of its purchase. The shares are more easily traded than are shares of other syndication partnerships. Thus, the REIT probably will give a good vehicle to satisfy the public's desire your can purchase real estate.

One last review of the factors that generated the difficulties of the 2000s is essential to understanding the opportunities that'll arise in the 2000s. Property cycles are fundamental forces in the industry. The oversupply that exists generally in most product types has a tendency to constrain development of services, but it creates opportunities for the commercial banker.

The decade of the 2000s witnessed a boom cycle in real estate. The natural flow of the true estate cycle wherein demand exceeded supply prevailed during the 1980s and early 2000s. In those days office vacancy rates generally in most major markets were below 5 percent. Confronted with real demand for office space and other forms of income property, the development community simultaneously experienced an explosion of available capital. During the early years of the Reagan administration, deregulation of financial institutions increased the supply option of funds, and thrifts added their funds to a currently growing cadre of lenders. At the same time frame, the Economic Recovery and Tax Act of 1981 (ERTA) gave investors increased tax “write-off” through accelerated depreciation, reduced capital gains taxes to 20 percent, and allowed other income to be sheltered with property “losses.” In short, more equity and debt funding was readily available for property investment than ever before.

Even with tax reform eliminated many tax incentives in 1986 and the subsequent lack of some equity funds for property, two factors maintained property development. The trend in the 2000s was toward the development of the significant, or “trophy,” property projects. Office buildings in excess of 1 million square feet and hotels costing hundreds of millions of dollars became popular. Conceived and begun prior to the passage of tax reform, these huge projects were completed in the late 1990s. The 2nd factor was the continued option of funding for construction and development. Even with the debacle in Texas, lenders in New England continued to fund new projects. After the collapse in New England and the continued downward spiral in Texas, lenders in the mid-Atlantic region continued to lend for new construction. After regulation allowed out-of-state banking consolidations, the mergers and acquisitions of commercial banks created pressure in targeted regions. These growth surges contributed to the continuation of large-scale commercial mortgage lenders [http://www.cemlending.com] going beyond the time when an examination of the true estate cycle might have suggested a slowdown. The capital explosion of the 2000s for property is really a capital implosion for the 2000s. The thrift industry no longer has funds readily available for commercial real estate. The major life insurance company lenders are experiencing mounting real estate. In related losses, many commercial banks attempt to lessen their property exposure after couple of years of building loss reserves and taking write-downs and charge-offs. Therefore the excessive allocation of debt for sale in the 2000s is unlikely to create oversupply in the 2000s.

 

Published by Charlesa Gibson