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spring 2009 |
Q&A: The Case for Optimism in the Real Estate MarketDavid Goss is a Managing Director at Essex Realty Group in Chicago. Founded in 1990, Essex specializes in the sale of investment real estate, focusing exclusively on the brokerage of properties valued between $1 million and $30 million, with an emphasis on the multifamily market. David has been involved in the industry for more than 20 years, beginning his career as a real estate and tax attorney at a large law firm before becoming a private investor and consultant. He has counseled hundreds of clients, including some of the country’s largest corporations, in major asset acquisitions, investments and divestitures. Much Shelist spoke to David about the current and future state of the real estate market. Much Shelist: The real estate market has been seen by many as being at the center of the current economic crisis. Do you agree and, if so, where are we in that cycle? David Goss: Clearly, the real estate market—and, in particular, the way properties and mortgages were bought, packaged and re-sold—played a role in the current economic downturn. The rise and fall of real estate prices was the proverbial canary in the coal mine. Cause and effect is much more difficult to determine, however; the changes in the real estate market were accompanied by a whole host of business practices and economic policies that, taken together, have resulted in the current global crisis. As for where we are in the cycle, I hesitate to say that we have reached the bottom of the downturn in real estate. For example, we are likely to see additional foreclosures, and credit remains tight. I do think, however, that there are reasons to be optimistic. MS: What are some of those reasons? DG: First, I think there has been a somewhat Darwinian shakeout in the industry. As prices were rising rapidly and asset turnover was high, deals were being cut with one eye toward the next opportunity. In that environment, getting into the real estate market seemed like a sure thing. Since the barriers to entry in this industry are relatively low, many individuals and businesses joined the fray without a strong background in real estate, finance or tax. All of that was fine, as long as property values were increasing. Once they started to fall, however, market forces began separating the speculators from the professionals. Those who've chosen this industry because they know it inside and out and enjoy their work are hanging on, while others are getting washed out. Second, it appears that sanity and rational behavior are returning to the market. Gone are the days when sales were based solely on zero cash flow and appreciation potential. Also gone are the days when credit was extended simply because someone asked for it. Sellers and buyers must now make a real business case for their investments. Sometimes, hitting a wall is a good thing. Rather than crying about what went wrong, smart professionals are asking themselves what they did right and finding ways to apply the lessons learned to the current situation. Third, the simple truth is that businesses and people require real estate. Individuals and families need to live somewhere, and businesses have to manufacture, store and sell their products someplace. As companies evolve in this current crisis and respond to their own industry dynamics, there will always be buyers and sellers. And where there is a buyer and a seller, there is a market. In my own business, which focuses on multifamily properties, we are already beginning to see an uptick in activity. As counterintuitive as this might sound, there is a sort of exhaustion out there. The level of fear and desperation seems to have settled. People aren't going to spend their time looking for the bottom when they have business to attend to. We know that some companies are still in distress and will need to sell assets. We also know that there are still bad deals out there, but the market appears to have taken that into account at this point. Buyers and sellers are coming together, and astute investors know where to look for reasonable opportunities. Without taking too short a view of things, it seems likely that the real estate market will begin a slow and methodical comeback in the mid-term. MS: If the credit markets are still tight, how are deals being accomplished? DG: Without a doubt, most transactions will continue to be financed using traditional lending practices: loans, mortgages, etc. At the same time, buyers and sellers are beginning to work creatively with their lenders to employ less-common options such as seller financing, wraparound mortgages, assumptions of existing loans and installment sales. These options may still require approval by lenders, but because they often use existing financing and minimize additional risk to the original lenders, certain banks, credit unions and other mortgage providers are willing to give the green light to these deals. Without sounding too cliché, this is America. While a certain level of “over-creativity” may have helped our economy fall into its current state, we are known for our ability to find innovative solutions to our challenges. Whether that involves changes to our lending practices, creating new financing options or a combination of the two, we will find a way to meet our real estate needs. And that will inevitably have a positive effect on the overall economy. If you have questions about the evolving commercial real estate market or would like more information on Essex Realty Group, visit www.essexrealtygroup.com or contact David Goss at 773.305.4830 or davidgoss@essexrealtygroup.com.
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