Despite much overbuilding and foreclosure of some syndicated properties, today's real estate problems are not as severe as those that struck a decade or so ago, according to Laventhol & Horwath's national director of real estate advisory services.
In fact, says James Noteware, who also is a partner in the accounting firm, some areas that developers had ignored for such hot cities as Dallas, Denver and Phoenix are now strong markets, primarily because they had been passed over.
"Lenders didn't want any part of Cleveland, Detroit or Chicago, and so demand stayed in balance," Noteware said at a meeting with real estate media here. "Now those markets are strengthening from a development standpoint.
"Detroit's turnaround is the most dramatic. It's just going gang busters."
There also has been a strong turnaround in the Northeast, especially in central New Jersey and suburban Baltimore, caused by an upturn in employment, he said.
"Los Angeles never went down," Noteware said. "It always has had a strong market. Only restrictive growth controls slowed activity. But Los Angeles may be peaking now."
Although overbuilding is a problem now, underleasing, which occurs when demand slows or stops, has not occurred, he pointed out. Thus, much of today's vacant space should fill up.
The foreclosures that have hit some syndicators also should not mean massive problems for syndicators, at least for the large public syndicators with deep pockets, Noteware said.
"They've bought huge numbers of buildings, and to have three or four properties foreclosed won't be a problem," he explained. "They've created diversified portfolios and are well capitalized with lots of equity in the partnerships."
A problem that began with inflation in the 1970s and continued with 1981's Economic Recovery Tax Act, the overvaluation of property, has disappeared because of the end of inflation, more careful appraisals and the end of some tax benefits, Noteware maintained.
"In the '70s, people were willing to overpay in the short term," he said. "But you make money from inflation only when you understand it before someone else does."
Lax appraisals by third parties who were "willing to inflate value on paper" also led to the overvaluing of properties. Such undisciplined appraising was one of the reasons Laventhol & Horwath got into appraising properties, he said.
In reaction to such appraisal practices, "the appraisal industry is going through a total revolution," he believes. But although the new appraisal standards being developed are "wonderful," Noteware said he feared that they would become "fair-weather standards, observed only when they're convenient to observe."
"ERTA created a lot of value in real estate by increasing the tax benefits," Noteware said. Real estate became worth more to the new buyer than to the seller, and the resulting high number of transactions further drove up prices. But now tax benefits are worth more to the seller than to the buyer, and so real estate values are falling, he added.
Have to Do Homework
With the end of these benefits arising from inflation, tax advantages and other changes, real estate investors now need to be smarter and do their homework, Noteware advised. The individual properties have to be looked at and market questions asked, he said.
"Investors have to look beyond faddishness and make sure economic returns come sooner rather than later," Noteware explained.
He also advised against playing "an interest rate game" and holding off on real estate activities. "We tell developers 'don't hold up,' " he said. "If rates go up, you're well off. And if rates fall from 8 to 6 1/2, if it worked at 8, it will work at 6 1/2."