Investment markets may overheat, C&W exec says

Real Estate Weekly, Oct 22, 1997

"Taxes are going down at a time when values are increasing," said Haeffner, an executive in the firm's financial services group. "Thus, the benefit to the seller of real estate is two-fold."

In stark contrast to the "credit crunch" President George Bush spoke of in his State of the Union message in 1992, and notwithstanding the ordeal of the early 1990's, there is an overabundance of investment capital freely flowing into real estate. Sources of capital include REITs, conduits, Wall Street debt and equity instruments, direct and indirect pension fund money, foreign investors and private funds.

Haeffner said the volume of both debt and equity capital in the marketplace, combined with the desire to purchase property on the part of REITs, has produced a "capital-driven market" which is expected to continue.

"Has capital been out front of the market?" Haeffner asked. "In some cases, yes. Investors are making capital-driven decisions that anticipate ever stronger fundamentals of the market than what we've seen to date."

Over the last three decades, real estate markets have been negatively impacted a number of times by the pressure put on investors to put capital to work. This was reflected by petroleum money in the 1970's; tax shelter vehicles in the early 1980's; and foreign investment in the late 1980's. In the late 1990's, the public markets, in the form of REITs, have taken the lead.

With the collapse of the thrifts and expanded opportunities for commercial banks in securities, combined with insurance companies strategic movement out of real estate equities, real estate markets are being driven by the lure of "inexpensive" public funding, Haeffner said.

"For the moment, public entities appear more focused on asset accumulation and size than anything else," he added.

The difference between now and the past, Haeffner said, is the REITs' earnings are interpreted by securities analysts. He asked, "Will the public markets have the discipline to police themselves? Is the new enthusiasm for more speculative development around the country destined to repeat the cycle once again?"