Institutions are bullish on growth, says Stan Ross

America's institutional owners of real estate, the greatest force impacting the real industry, see continued steady growth ahead with little chance for a recession. That's the message delivered by Stan Ross, managing partner of E&Y Kenneth Leventhal Real Estate Group, Los Angeles, in his keynote address to the National Association of Industrial and Office Properties (NAIOP) annual conference held in October in Las Vegas.

His address, titled "Toward the Year 2000: Forces Shaping the Future of Real Estate," focused on the impact of the institutional markets on the nation's $3 trillion real estate industry. According to Ross, institutions control some 40%, or $1.2 trillion, of property from sea to shining sea.

Ross identified some key trends shaping the future of our real estate industry through the year 2000, including the role of the Federal Reserve, population growth, Washington, D.C. and new technologies.

"As far as the institutions are concerned they believe that change will take place, they believe the near future outlook will be modest growth rather than a recession," said Ross. "They believe the deficit long term can be controlled. Now I don't know if that's true. I have five grandchildren; my last one just arrived three weeks ago. I wrote her a note on a real statistic. I said, `Welcome to the new world, welcome to the United States, your share of the deficit is $60,000.' That is a real number. So I want you to know that our family is working towards picking up our share of the deficit. So we have six of them now that have picked it up."

The growth outlook is best summed up in one word -- slow.

"All of the institutions believe that (Alan) Greenspan and the Federal Reserve, through all of its great economic management, have successfully orchestrated the economy to what everyone believes is a soft landing. This is moderate real growth, real slow, probably under 2.5%. All of the way out to 1997 and you don't see 3% coming back. Now those of you that are Greenspan followers, I just want to share one thing with you, because I go and listen to him all of the time. A New York economist by the name of Jerry Gluck wrote Greenspan's tombstone. It will say, `I am guardedly optimistic about the next world, but remain cognizant of the down-side risk.'

Two other key factors are at work -- flat unemployment numbers and a rapidly growing population.

"We're talking about a projected increase in total U.S. population of 60 million people from 1995 to 2020," said Ross. "That's a lot of people that are coming in. Give me that kind of number of population growth, and I'll give you an economy that is going to be stimulating."

About 80% (48 million) of our absolute population growth will occur among minority groups, said Ross. Also, by 2020, almost 45% of U.S. children under age 19 will be a member of that minority group. "So if you not planning and strategizing and tooking out as to what you have to do to adjust, than your missing a force that goes into the future," said Ross.

Globally, the United States has the world's most competitive economy. "You're seeing a very dramatic change in the positioning of the United States, both domestically and on a global basis," said Ross.

From 1990 to 1994 all of the nation's biggest metropolitan areas grew by 2% or more except for New York, Philadelphia, Boston and Detroit. The Big Apple still maintained its title as the nation's biggest metropolitan area, with Boston, Detroit and Philadelphia growing at a very slow rate compared to Las Vegas, where the growth rate included a 26% population surge. "It looks good, obviously it looks good to the Californians that are coming here," said Ross.

California, the lone holdout on the national economic recovery, is experiencing some positive movement. "I'll just give you one indication. I took a drive towards a residential tract the other day, this last weekend, and as I was driving I saw that they were framing a church and I asked them what the denomination was, and they told me they were "specing it," it was a "spec church." So I think the market is coming back in California," said Ross.

By property type, Ross painted some broad-trending brush strokes:

Retail -- "A little flat but every single trend line is up."

Suburban Office -- "Do you think people are out looking at suburban office buildings and buying them? They sure are."

Total office vacancies -- They declined by nearly 5% in the first half of 1995 for the nation. Ross listed the following Metropolitan areas as already showing office vacancies less than 10%: Albuquerque, Charlotte, Boston, Columbus, Las Vegas, Portland, Salt Lake City, San Francisco and Washington, D.C.

"Now remember these institutions were reporting that it would take us 40 years to absorb the entire over-supply," said Ross. "I used to go to these meetings and conventions in the industry, and one guy said, `We got enough for the next 30 years.' Another said, `No I think it's 35 years.' It was like a bidding war. Now all of a sudden someone said I think we're going to be out of this real quick, and they keep looking at these stats. Stand by for some construction."

Industrial -- Declining vacancies are the rule. "If you take a look, most industrial markets around the country show a single-digit vacancy rate, with less than 15% having double digits. That an important number on the industrial. "However, there was a large reduction in speculative space coming out. With this kind of decline, what you're talking about is that industrial spec space is anticipated to grow. At the present time, 25% of the total supply is estimated to be spec." Ross also mentioned metropolitan areas showing vacancy rates of less than 4%, including Salt lake City, Cincinnati, Portland, Jacksonville, Oklahoma City and Seattle.

Retail -- A 21% increase in new retail construction last year says it all. "It doesn't take much in new construction to put up a signal at the institutional level. They believe the retail sector is undergoing structural changes that will have a big effect on where the growth is going to come from. The construction levels are higher than the overall retail demand would justify. All I can tell you is I have my wife and family out there trying to help, but we can't do it alone.

Multifamily -- "They (institutions) believe there are some real opportunities on the apartment side." The apartment properties, the highest returns for them in terms of their numbers and the rents out there, have had a major impact on the multi-family.

Interpreting all of the statistics and market data out there is still an imprecise business. As usual, Ross was not at a loss for words relating to this subject.

"The best story is my nine-year-old grandson playing in his last little league game. This is the playoff series. It's the first inning, the other team is up, they score 19 runs. The inning's over and my grandson comes in and I say, Mark this is just terrible; what are we going to do? You have to be feeling terrible.' He says, `I don't know what your problem is, we haven't got up.' Now that is real optimism. That's what our industry needs. I sat and looked at him. He never gave it a second thought. What do you mean supply and demand? What do you mean interest rates? Just give me my shot and we are going to go out there and win. He didn't win."

One major influence that can never be ignored, but often misinterpreted, is the nation's lawmakers in Washington, D.C.

"You know whenever Washington meets something bad will happen to you," said Ross. "It's inevitable. And they have been meeting around the clock. It's the most fun time I have when I look to see our Congress in action."

Congress has been flirting with increasing the individual and corporate capital gains tax rates for years now, and they may finally do it. "What does that mean in real estate as you read about it in the paper? There's billions of dollars of transactions standing by ready to be unleashed at 19%," said Ross. When that window opens up you're going to see a number of transactions I think that will shock you. That was the good news."

The bad news according to Ross is the repeal of the low income housing tax credit (LIHTC). "That was terrible and that was a major level of activity in the country," said Ross. "I don't think that will pass. But it's in there right now."

Ultimately, technology will help us all to learn more about what's happening. "I think we'll be wrapped up in a whole new world of sophisticated technology in the real estate industry," said Ross. "I think that econometric financing and forecasting models for specific real estate will become more en vogue as we move forward. I don't think it will be simple. I think it will be complicated. The more complicated it is the more we love it. Welcome to a more complicated world, a more challenging world.

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