A Buyer's Market But No Buyers

Real estate will be a real horror story in 1991. The recession will only worsen the effects of the 1980s overexpansion that left the market glutted with houses and office space. The real estate collapse has already claimed numerous victims: bank loan portfolios, insurance company investments, and homeowner equity. The best that can be said for 1991 is that, with prices falling, it will be a good time to buy. "But don't think you can turn around and sell soon," warns Richard B. Stern, executive vice-president of Real Estate Research Corp. in Chicago. "A recovery may take until the mid-1990s."

Signs of the rout are everywhere. In 1991, just 850,000 houses will be built, 3% fewer than in 1990, according to McGraw-Hill Inc.'s Construction Information Group. By the end of 1990, starts had already fallen to their lowest level since the 1981-82 recession. Developers' sales of new single-family houses--excluding those built on contract to individuals--will drop to 520,000. That's down 4% from 1990's total, which itself fell a disastrous 16% from 1989, says the National Association of Realtors. The picture is no better for existing houses: The NAR is projecting a 3% falloff this year, to 3.2 million sales.

HARDY SOULS. The problems are similar in the overbuilt office market. Excess supplies appeared first during the mid-'80s in the Southwest. In 1990, the surplus spread nationwide, and office vacancies rose one percentage point, to 18%. In 1991's first half, the rate could spurt to 20%, predicts Coldwell Banker Commercial Group Inc. Every major city shares the impact, from Los Angeles and Chicago, with 15% of office space unused, to New York, with 17%, and Atlanta, 24%.

In such an atmosphere, only a few hardy souls are planning new projects. In Dallas, the office vacancy rate is a towering 26%. But Chubb Realty Inc., a subsidiary of insurer Chubb Corp., last March committed $200 million for a half interest in the huge Fountain Place building, and it will help fund construction of another office tower. Thomas V. Bermingham, a Chubb senior vice-president, says the Dallas market may be nearing a rebound.

Maybe so, but office vacancy woes elsewhere are still claiming victims, even some high-flying developers from the 1980s boom. Consider John C. Portman Jr., the atrium pioneer. In early October, creditors forced him to give up control of his crown jewel, the 13-block Peachtree Center in Atlanta.

The hotel sector, where an orgy of construction occurred in the past decade, is an even worse wasteland. Much of the expansion was propelled by tax breaks that vanished after the 1986 tax overhaul. Savings and loan associations, whose investment activities were deregulated as the 1980s began, lent heavily to builders of lodging. But demand for rooms turned out to be nowhere near what had been forecast. At 65%, occupancy rates are flat. So are room rates and revenues. Last September, Prime Motor Inns Inc. of Fairfield, N. J., sought Chapter 11 bankruptcy protection, taking with it 33 of the 350 hotel properties that failed in 1990. The 1991 body count could be twice that.

The forecast isn't as uniformly bleak for retail properties. Bankruptcy filings among department-store chains, such as Campeau Corp.'s Federated Department Stores Inc., which owns Bloomingdale's, are worrisome. But they haven't yet led to a glut of retail space. Regional malls, which weren't swept up in the expansion mania, are holding their own, though curtailed consumer spending this year could devastate thinly capitalized strip shopping centers.

One of the few bright spots in 1991 will be industrial properties, especially warehouses, which are not overbuilt. Vacancies, figures Salomon Brothers Inc., will rise only slightly, to 7.5% this year from 7% in 1990.

Any good news there, however, will be more than offset by the gloom in housing--even though mortgage rates are falling. At the end of 1990, they stood at an average 9.8% for 30-year conventional loans, down from 10.4% six months earlier. They could drop as low as 9% by summer. But the recession is blowing holes in purchasing power, and lenders are becoming cautious. So even willing buyers may have to wait. "Falling rates won't be enough to make the housing market snap back right away," predicts Robert Van Order, chief economist for the Federal Home Loan Mortgage Corp. The delay will harm builders. Take Hovnanian Enterprises Inc., a Red Bank (N. J.) builder that stayed profitable in the last recession. It expects to lose $14 million in its fiscal year ending Feb. 28.

RIDING IT OUT. Part of housing's problem is affordability. Prices were bid up feverishly in the 1980s, particularly in the Northeast and California. These markets have cooled, but a home is still out of reach for many buyers. In California, the price of an average single-family house doubled in 10 years, to $197,000 by February, 1990. Lately, that has slipped--to a still-lofty $192,000.

Despite all the bad news, some optimists figure they can ride out the storm. Pension funds, with just 4% of their assets in real estate, and insurance companies, with 3%, aren't as exposed as banks. And foreign money is still coming into U. S. real estate, albeit more slowly. Witness the $940 million purchase last fall of California's fabled Pebble Beach golf complex by Japanese developer Minoru Isutani. But total new Japanese investment in U. S. real estate will drop to $7 billion in 1991, down from $10 billion last year, predicts Kenneth Leventhal & Co., an accounting firm. In the current environment, says the Real Estate Research Center's Stern, property investments "are long-term and, to pay off, require patience." In 1991, anyone planning to make money on real estate will need a lot of that.