1980's and 2008 whats the difference

Nov 17, 2008

The current economic slump is significant, but it certainly isnt unprecedented. Well before current market conditions, market watchers and experts talked about the downturn of the late 1980s and early 1990s. The Boston Business Journal asked a few industry experts if there are any differences between the market downturn of the 1990s and todays situation.

With the current economic situation, there is naturally a growing concern around the health and well-being of the commercial real estate market. History has shown us that we should worry and industry pundits are carefully monitoring the news, stock market and industry trends anticipating general doom and gloom. Yet in Boston, this concern has proved valid yet unnecessary as the citys commercial real estate landscape remains relatively unscathed to date. Are we destined to not repeat history?

In the late 1980s and into the early 1990s, commercial construction was booming. Everywhere you turned a new strip mall or office building was going up. During this time, lenders were not as cautious with underwriting and approving projects because funding was readily available and, as we know, this eventually caught up with the industry when the bubble popped. The result was a significant oversupply of commercial space which drastically brought down the value of commercial buildings. However, when we compare that time to todays real estate market, we are faced with a very different landscape.

The issues the commercial real estate sector is faced with today are not the over-abundance of real estate or indiscriminate lending. The problem lies with the lending industry. It is true, we are in a credit crisis, but that doesnt mean that every industry will suffer. Currently, the vacancy rate in Bostons commercial real estate market is extremely low; however there is no lending capacity. With the lack of lending, buying and selling is at a standstill, and companies are being more cautious and delaying real estate deals.

What history has taught us is the need to keep a close watch on operating costs and the current economic situation as the safest bet for property owners in todays market. Unless a commercial property owner is facing maturing debt, they should hold onto their property and work closely with tenants and lenders until the credit markets adjust to the new reality. This is the time for open communication and careful assessments of operating costs and portfolios, not the time to overreact.

Donald Greenhalgh, CPA, Dicicco, Gulman & Co. LLP.

The key difference between the real estate slump of the 1990s and todays downturn is rooted in financial services. Without a doubt, the financial services industry seems to have been hit much harder in the current downturn. There is a glimmer of hope, though. The industry sectors that dominate in Boston are focused more on custodial, mutual fund and advisory services than actual trading and holding for the companys own portfolio. As a result, Boston should weather the storm better than most, as these services will remain in demand: our IRAs and

401(k)s may be of less value, but we still need custodians and advisers for them, and many of us still want mutual funds to invest in.

It is troubling that today Boston is headquarters to fewer corporations than in the 1990s, creating risks because companies are more likely to close branch facilities than headquarters. For the real estate industry, this affects both the amount of commercial space that could be vacant and the unemployment rate.

Prior to the current crisis, the cost of housing consistently had been cited as a challenge to Bostons competitiveness. The real estate boom that helped get us out of the 1990s slump slowly exacerbated the problem, and, some would say, significantly contributed to the current crisis. If we can move toward making housing more affordable as we address todays real estate crash in general, we would be laying the groundwork for a much healthier economic future in our region.

Donald Vaughan, partner and co-chairman of the real estate practice at Burns & Levinson.

The impact of the struggling economy is giving every major industry reason to speculate at what lies ahead. While construction is no different, its important to remember its difficult to cast a forecast for the industry as a whole; instead, its best to approach them as individual markets.

Though housing, commercial and retail markets have faced a downturn for some time now, traditionally stable institutional markets such as health care and higher education are facing challenges of their own. Earlier this year, consulting firm FMI forecast a 3 percent decline in construction spending for both health care and education in 2009. In conjunction with Moodys prediction of a 30 percent decrease in most college and university endowments in 2008, some major capital projects may get put on hold until bond markets and the fundraising environment become more favorable. Builders drawn to these markets from other sectors are likely to find fewer opportunities and a competitive disadvantage against firms that have built their reputations on relevant academic and health care work.

Smaller projects related to infrastructure upgrades and deferred maintenance will likely continue; perhaps even more important is the potential for owners to invest in sustainability. The proven return on investments of upgrades like building envelope and heat recovery systems and the ability to offer a higher quality environment for end-users in a retrofitted building will help institutions move forward while the economy catches up.

The national economy has put all industries into a tough spot for how long remains to be seen. The construction industry has weathered downturns before, and will continue to find new ways to develop opportunities. The chance to invest in training for our workforce, create stabilization in materials prices and bring equilibrium to an overcrowded market are all potential benefits, and companies that plan well will come out ahead.

Anthony Consigli, president, Consigli Construction Co. Inc.

The recession we are weathering today is far more severe and broad in scope than the past two downturns. However, similar to the period that led the slow down in the early 90s, there is a common culprit: the abundance of capital.

The lackadaisical lending standards that were prominent in the banking industry in the 1980s made it easy for a plethora of eager developers to build buildings without any pre-leasing or recourse. This excessive availability of capital spurred the development of 21 new buildings or 12.7 million square feet of new supply in Boston between 1980 and 1992, representing a 42 percent increase in inventory. Unfortunately tenant demand did not grow at the same pace, quickly leading to a spike in vacancy rates and numerous non-performing real estate loans for banks. Unlike today, most of these banks held these loans, versus selling them off, and ultimately failed. This, as we all know, fueled government intervention and the formation of the Resolution Trust Corporation.

Like last time, lenient lending standards and an overheated financial system have put landlords in a difficult position. Fortunately for Boston, since 2003 there has been a lack of new supply coming online since the delivery of 33 Arch Street in 2004.

Although we do expect sublease space to put upward pressure on availability, availability is at its lowest since the last peak in 2001. Buildings continue to be filled with tenants, and owners not facing maturity risk are well positioned.

 


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