Research Study: Replay of 1990s' Real Estate Recession Unlikely

By JACK LYNE • Site Selection Executive Editor of Interactive Publishing

ATLANTA and NEW YORK -- When big kahuna Alan Greenspan starts tossing around phrases like "stalling out" and "downside risks," you know that real estate assets are in for scrutiny that's even more demanding than usual.
So it's more than a little interesting to learn this: "Core real estate assets outperformed all major asset classes by a very wide margin on a risk-adjusted basis over a recent three-year period." Pressler

At least that's the conclusion from a study by researchers at Atlanta- and New York-headquartered Lend Lease Real Estate Investments (LLREI www.lendleaserei.com), which handles more than US$89 billion in assets.
Moreover, the LLREI researchers concluded that, "with broad equilibrium across markets," a replay of the early 1990s' real estate recession is unlikely.
LLREI's research team, however, wisely hedged their bets: "So, will the next several years be more like the last three years or more like the decade interval, which included a recession, a major real estate glut and a long readjustment period? Truthfully, no one can be sure," they concluded.

Sheryl K. Pressler (above) is U.S. CEO of Lend Lease Real Estate Investments,
which has some 2,000 employees and manages client portfolios of $41 billion-plus.

13 Times Less Risky than Dow Jones?

Comprised of Joseph Hill, M. Leanne Lachman and Daniel Van Dyke, the research team was more definitive about their investment analysis, which used data from third-quarter 1997 to third-quarter 2000.
"Core real estate outperformed the 10-year Treasury bond, the Wilshire REIT index and the Russell 2000," they reported.
Not so, though, for the Dow Jones Utility Average, with an 18.7 percent average annual return, and the S&P 500, with a 14.9 percent average annual return. Both those returns outstripped the 13.6 percent return for the NCREIF Property Index. (NCREIF is the National Council of Real Estate Investment Fiduciaries at www.ncreif.org)
Those figures, however, don't factor in risk, the researchers added.
"The NCREIF Property Index total return had the lowest standard deviation of returns among the asset classes we examined . . . much lower than other income-type investments to which real estate is often compared," the study reported.
The Dow Jones Utility index, in fact, recorded a standard deviation of returns 13 times greater than the NCREIF Index (which is almost entirely made up of unleveraged, institutionally owned assets), the study reported. And the S&P 500's standard deviation of returns was 12 times greater than the NCREIF Index.

'Good Real Estate Performance Going Forward'

The LLREI study, however, won't likely have much impact on corporate real estate strategies, even though it will surely prick up investors' ears. For most expanding firms, factors like flexibility and speed will continue to be key real estate drivers. Investing in real estate simply lies outside most companies' core competencies.
On the other hand, the study's conjecture on the direction in which today's stall-imperiled real estate market is headed will command many industry players' interest.
"We expect good real estate performance going forward, even if a recession were to occur," the study asserted. "The conditions now being enjoyed across America's real estate markets are so much better than they were going into the '91 recession."
Three key factors, the report noted, stand in stark contrast to the early-1990s' scenario: "much lower" vacancy rates, positive rental growth, and the fact that real estate "is not richly priced compared with other assets."

'Ace in the Hole': Expanding Productivity

What happens, then, if today's "downside risks" develop into rising vacancy rates?
"Vacancies are low enough today that even a small increase occasioned by recessionary pressure would likely slow rent growth, but not stop it or reverse it," the LLREI report contended. "Thus, prices would not take the 30 percent to 50 percent hit that occurred a decade ago."
Finally, the research perceived another strong silver lining that wasn't part of the environment that spawned the real estate debacle of the early 1990s:

"Expansions do not die of old age; rather, they die because of imbalances - usually inflation triggered by an overstressed economy," the authors asserted. "The ace in the hole this time around is the fact that productivity has been expanding at such a rapid pace that even accelerating wages have not caused a rise in core inflation."

(The entire report, "Today's Core Values," is available at the LLREI Web site
in the site's "Investment Research" section.)