Home Is Where The Recovery Is

After spending three years in intensive care, real estate is finally on the mend. The pulse of housing Ademand is quickening, and commercial real estate is in stable condition. Still, the industry's convalescence is just beginning, and a full recovery may be years away.

Housing, as the saying goes, leads the way out of every recession-and this year is no exception. Sales were up 7% for existing single-family homes in 1992. And the National Association of Realtors projects that sales of such homes.will hit 3.5 million in 1993, up 3%. "Any time a housing uptum has begun, it never has reversed itself," says J. Larry Sorsby, senior vice-president for finance at Hovnanian Enterprises Inc., a homebuilder based in Red Bank, N. J. And this tune, there's healthy demand: During the recession, people put off buying homes and making other large purchases for fear they would lose their jobs. "They'll be coming back at a moderate pace as the economy improves," says David W. Berson, chief economist at the Federal National Mortgage Assn.

The key factor in the housing upturn so far has been a moderation in prices and mortgage rates. Home prices nationwide were up 4.9% in 1992. Even so, home-ownership costs are at their lowest levels in 15 years, according to Harvard University's Joint Center for Housing Studies. That's partly because of interest-rate declines the Federal Reserve engineered to combat the recession. Rates on 30-year conventional mortgages fell from 10.7% in 1988, to a low of 7.9% this past September, before nudging up to the current 8.4%. The rate may climb to about 8.8% by yearend, housing experts believe, but that's still low by recent standards.

RAW DEALS. It should be low enough, in fact, to provide the first decent year for homebuilders since 1989. The recession weeded out lots of smaller players: Failures surged to 5,000 in 1992, more than double the level in 1989. But those who survived are well-positioned, especially the ones that snapped up raw land at bargain prices. Hovnanian, for instance, has secured 8,000 vacant lots during the past two years for about half the price it was paying during the booming mid-'80s. Earnings outlooks for most name builders are rosy for 1993. Oppenheimer & Co. projects that PHm Corp. in Bloomfield Hills, Mich., will earn $4 a share this year, up from $2.90 in 1992. "Demand for houses is up and labor costs are down, so builders should do very well in 1993," says Oppenheimer analyst Barbara K. Allen.

Prospects in commercial real estate aren't nearly as good, but there is a positive side: The disaster may be over, and the cleanup is starting. Downtown office vacancies across the country seemed stuck last year at a stubbornly high 18.5% rate. "We saw rents drop 20% to 30%," says Arthur J. Mirante, president of real estate brokerage Cushman & Wakefield Inc. "Thank God they've stabilized." The one exception may be California, whose office market is still in a free fall.

Unlike housing, the office-building market won't be helped much by the recovery. Ongoing corporate downsizings mean slow growth in the white-collar work force, so excess office space may not be filled until near the end of the decade. First to recover will be suburban offices, since most construction of them stopped two years ago. Not true with big downtown buildings: Some projects in the pipeline when the recession hit couldn't be stopped.

WAITING GAMES. The outlook for other commercial real estate also is unappealing. Overbuilding of apartments in the '80s led to an unusually high 10% vacancy rate in multifamily housing in 1992. The rate may not budge this year. One reason is that the recession forced many young renters, the traditional apartment dwellers, to double up or move back with their parents. Construction of new units fell last year, however, to one-fifth the record 576,000 put up in 1985. So analysts say supply may level out with demand in a year or two.

Meanwhile, many landlords are shrinking their holdings to a more profitable core: Cardinal Industries Inc. in Columbus, Ohio, which emerged from Chapter 11 in 1992, has about halved its number of apartment complexes, selling the rest to pay down debt. After a wild expansion in the 1980s, hotel chains are playing a waiting game, too. Occupancy rates were at an abysmal 61% last year, and that won't improve soon.

Retail space is one of the few sectors of commercial construction where overbuilding haset occurred. Indeed, vacancy rates at malls are running a slim 5%. Still, recent bankruptcies and restructurings at major department-store chains may soon lead to a shakeout in mall-land. The Chicago-based Real Estate Research Center Corp. expects 10% of the 1,500 U. S. malls to disappear by the end of the decade.

Opportunities still exist, however. Manhattan-based Eastdil Realty Inc. is converting a White Plains (N. Y.) store once occupied by now-defunct B. Altman & Co. into a shopping center. "Our research has shown this is an under-retailed area," says Eastdil Chairman Benjamin V. Lambert. "This is a good selective shot." For commercial real estate in 1993, that's about as good as the news will get.