How high is up? - real estate market - Annual Review and Forecast, section 2

One difference between the current real estate market and the booming market in the 80's is that today, we are asking the question "How high is up?"

Back in the Eighties, there existed a euphoric "Field of Dreams" mentality. Developers were out in droves, borrowing money hand-over-fist, and were driven by the all-consuming belief that "If I build it, it will be leased." Eventually, oversupply put a drag on rents, demand died, and - coupled with the credit crunch and banking crisis - the bottom of the real estate market fell out. The consequences of the excesses of that time are still in memory, so any optimism we feel is tempered with caution. Gone are the days of sitting over computer spread-sheets and watching hypothetical 10-year value projections rocket out of sight. Today, increasing values are much more rooted in solid supply and demand fundamentals. Checks and balances are quickly brought to bear at the slightest hint of excess.

Like most other industries, the real estate industry is cyclical. Lately, however, the peaks and valleys seem to be more pronounced. Could it be that after continued steady growth, the industry will find a higher base from which to moderate? If that does happen, it will be because the U.S. business community has been doing a good many things right.

Under the pressure of foreign competition (which is not about to go away), the belt tightening, back-to-basics fervor of American business has generated solid growth - and, for the foreseeable future, should continue to do so in an ongoing atmosphere of low interest rates and low inflation.

What is surprising is how sustained the absorption rate of commercial space has been since the industry began its climb out of the doldrums of the mid-80's - especially when one factors in the constraining impact that telecommunications can have on our industry. Today, two or three traveling salespeople with laptops can co-ordinate their schedules so they can use the same office on different days of the week. Telecommunications has made more types of home businesses feasible, and large companies and government agencies have introduced "work days at home" programs to reduce operating costs.

In spite of all this, a tremendous amount of money - both public and private - has poured into New Jersey from Wall Street for the purchase of buildings and/or entire portfolios, as well as for new construction in less developed counties such as Morris and Essex.

In Bergen County, with few opportunities for new development available, there has been a tendency to redevelop existing well-located properties - either upgrading the existing use or converting the existing use to a use in higher demand.

While our emphasis in recent years has been on management rather than new construction, we always have our eyes open for "a diamond in the rough" in Bergen County. We believe, the rehabilitation of an existing well-located building for a new use would represent an exciting and profitable opportunity for us.

What's in store for the industry? No one has a crystal ball, of course. But one thing is for certain - the "Field of Dreams" mentality of the 1980's is history that isn't about to repeat itself anytime soon. Although, as a conservative, privately-owned company in business since 1945, that is a free-wheeling attitude to which we never have subscribed.

Currently, we are enjoying a 96 percent occupancy rate for our commercial space. In fact, at any given time, our occupancy rates have tended to be a good deal above industry averages. That allows us to muse about the future from the secure vantage point of knowing that our company will weather the storms of the future as it has weathered the storms of the past, but perhaps more importantly, that our company will remain poised to seize upon the opportunities that present themselves, whatever form those opportunities may take.

COPYRIGHT 1998 Hagedorn Publication
COPYRIGHT 2004 Gale Group