Will the volatility of the real estate cycle continue?

Real Estate Issues, Dec 1997 by McCoy, Bowen H

At this time, certain economists and financial reporters are predicting the end of the business cycle as we have known it. As real estate practitioners, most of us would probably disagree with that premise. In my opinion, one of the fundamental factors which causes real estate to become overbuilt toward the end of each cycle is the lack of "perfect" data and information. "Irrational exuberance" is undoubtedly a factor as well.

Real estate disclosure has benefited greatly in recent years from broader access to the public markets. Informational requirements of the Securities and Exchange Commission, the rating agencies, security analysts, market makers, and investors have brought forth a much greater database for real estate assets held in real estate investment trusts or in commercial mortgagebacked securities portfolios. As more and more assets are captured in the public market, it may become possible to construct national and local indexes of rental rates and vacancies which are more reliable than what has previously existed. The existence of such data may eventually mitigate the volatility of the real estate cycle.

As more and more reliable data enters the public marketplace, one might even envisage the construction of property indices which could be traded, much as one trades the Standard and Poors 500 Index. If such indices were to exist for both the national and local markets, and by different property types, an investor could go long or short any particular property type or location. A prospective large office tenant, for example, could hedge the possibility of rising rents by purchasing an index to hedge the risk.

The increased appeal of real estate to the public markets becomes a self-fulfilling prophecy. As more and more real estate is subject to the rigorous reporting standards of the public markets, more and more confidence will grow in real estate as an investment asset class, and the more demand there will be for real estate in the public markets. We may see a day when "perfect" information will be available on-line for each significant market and property type.

When that day arrives, and we are swamped with information and data, Counselors of Real Estate will be in even greater demand to apply their wisdom and judgment to make sense out of it all.

Bowen H. "Buzz" McCoy, CRE

1997 President

The Counselors of Real Estate