The Outlook
- January 3, 2001 - Don't expect a deluge of foreclosures or bankruptcies even if the downturn worsens. The real-estate industry isn't as highly leveraged today as it was during the late 1980s. Even if rents decline and vacancy increases, most properties should have the cash flow to stay afloat. "We're somewhat insulated from the overall economy," says Janice Stanton, head of research for Cushman & Wakefield, based in New York.
Indeed, some expect to see a flurry of deals during the first quarter. Insignia/ ESG is tracking 64 tenants in the New York region looking for blocks of space larger than 100,000 square feet. In San Francisco, many tenants are waiting on the sidelines for the market to soften, says Mike McCarthy, of real-estate company Colliers International. "When deals are presented, they'll jump on them," he predicts.
But that doesn't mean there isn't going to be any pain and suffering. Owners who bought or refinanced property in fringe areas at the top of the market may have difficulty getting their projected rents. Also this year, expect to see a slowdown in construction as developers and financiers react to signs of a slowdown. Two years ago, Seattle developer Jon Runstad was breaking ground on office buildings without any preleasing. But today, he says he wouldn't do that.
Tim Hadro, who runs the real-estate lending business for BancOne Corp., says he has grown more conservative about making construction loans. "There are always good reasons to make exceptions to our normal lending standards," he says. "But this is a year that the exceptions will be few."
Not everyone is interpreting the economic slowdown as a message to retreat. Douglas Shorenstein, chief executive of San Francisco's Shorenstein Co., says real estate's supply and demand fundamentals are still healthy. "What's changed is that the capital is sitting on the sidelines," he says. "As a result we see this as a good time to be buying."
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