Although serious imbalances between supply and demand have continued to affect real estate markets in the 2000s in many areas, capital mobility in today’s sophisticated financial markets is encouraging for real estate developers. The loss of tax havens markets absorbed a significant amount of real estate capital and, in the short term, had a devastating effect on industry segments. However, most experts agree that many of those driven by real estate development and the real estate financing business were unprepared and unsuitable as investors. In the long term, a return to real estate development based on the fundamentals of the economy, real demand, and real profits will benefit the industry.
Syndicated real estate ownership was introduced in the early 2000s. Because many of the early investors were adversely affected by the collapse of markets or changes in tax legislation, the concept of syndication is now being applied to real estate with stronger cash flow and profitability from an economic point of view. This return to good economic practices will help ensure the continued growth of syndication. Real estate investment funds (REITs), which suffered greatly in the real estate recession of the mid-1980s, have recently reappeared as an effective vehicle for public ownership of real estate. REITs can efficiently own and operate real estate and raise capital for their purchase. Shares are more easily traded than the shares of other syndication associations. Therefore, REIT is likely to provide a good vehicle for satisfying the public’s desire to own real estate.
A final review of the factors that led to the problems of the 2000s is essential to understanding the opportunities that will arise in the 2000s. Real estate cycles are fundamental forces in the industry. The oversupply that exists in most types of products tends to limit the development of new products but creates opportunities for the commercial banker.
The 2000s saw a boom cycle in real estate. The natural flow of the real estate cycle in which demand outpaced supply prevailed during the 1980s and early 2000s. At that time, office vacancy rates in most major markets were below 5 percent. Faced with real demand for office space and other types of real estate, the developer community simultaneously experienced an explosion of available capital. During the early years of the Reagan administration, deregulation of financial institutions increased the availability of funds, and savings added their funds to an already growing pool of lenders. At the same time, the Economic Recovery and Taxes Act of 1981 (ERTA) gave investors an increase in tax “cancellation” through accelerated depreciation, reduced capital gains taxes to 20 percent, and allowed other income to be protected by real estate “losses. In short, equity and debt were available more than ever for real estate investment.
Even after tax reform eliminated many tax incentives in 1986 and the subsequent loss of some capital funds for real estate, two factors sustained real estate development. The trend in the 2000s was toward the development of significant real estate projects or “trophies. Office buildings of more than one million square feet and hotels costing hundreds of millions of dollars became popular. Conceived and implemented before the passage of tax reform, these huge projects were completed in the late 1990s. The second factor was the continued availability of funds for construction and development.
Even with the debacle in Texas, New England lenders continued to fund new projects. After the collapse in New England and the continuing downward spiral in Texas, lenders in the Mid-Atlantic region continued to lend for new construction. After regulation allowed out-of-state bank consolidations, mergers and acquisitions of commercial banks created pressure on target regions.