While Sept. 11 pushed the "r" word from uneasy worry into inescapable reality, a strong real estate sector could play a significant role in making the U.S. recession both shallow and short-lived. At the same time, the recession may trigger considerable changes in not only how real estate is done, but in who does it.

        That's the picture that's shaping up - at least in the view of a number of well-regarded economic analysts and seasoned industry observers.
        Among that number is Sam Zell, chairman of Equity Office Properties Trust (www.equityoffice.com).
        "I don't think we are in a catastrophic situation. Despite the fact that we are in the middle of a recession, the real estate industry balance sheet has never looked better," Zell observed at the recent UCLA Extension Real Estate Finance and Investment Conference in Los Angeles.
        Gerald Cohen, New York-based regional director with Ernst and Young (E&Y) Real Estate Advisory Services (www.ey.com), agrees that real estate retains substantial value. So much so that many companies are already using that value to counter the recession.
        "Even after 9/11, real estate is still one of the most valuable assets on a corporation's books, and [it's] also a more flexible asset than most CFOs might think," Cohen noted. "Companies facing the economic downturn are moving quickly to wring as much value as possible from their real estate."

Getting More Value with Greater
Densities, Off-Balance-Sheet Financing

Many companies are trying to squeeze out more value by increasing employee densities, said Zell, who chairs a company that owns and manages about 125 million sq. ft. (11.25 million sq. m.) of U.S. office space.
        Other firms may try to generate growth capital by selling pricey assets. Offloading real estate, however, isn't necessarily the wisest approach to beating the downturn, Cohen contends.
        "Outright sales aren't always the best strategy," he asserted. "Innovative off-balance-sheet financing techniques such as synthetic leases, sale/leasebacks and other capital strategies allow companies to access equity in property assets while still maintaining a high level of control over their real estate.
        "Capital obtained can be redeployed in the company's business plan to fuel future growth," Cohen added.

Zell: Industry 'Needs
Different Kinds of Employees'

On the other side of the equation, the recession is upping the heat on landlords, who face even greater pressure from tenants trying to reduce their real estate expenditures, said Zell. For one thing, Zell explained, the recessionary environment will spur tenants to increasingly regard real estate as a commodity. As a result, landlords will be required to differentiate themselves by boosting marketing and services to levels that reach well beyond previous levels of expertise.
        "The real estate industry as we know it needs different kinds of employees going forward," Zell said. Those different kinds of employees, he explained, may not have real estate backgrounds. Instead, they may be valued for their skills in finance, marketing and corporate operations.
        Similarly, the recession may alter the expertise levels needed on the corporate real estate side, some industry observers contend. For example, John Heffron, Philadelphia-based regional director with E&Y Real Estate Advisory Services, feels that the need for greater skills in managing construction and facility costs may create the need for what he calls "project managers-plus."
        "Keeping a lid on costs is always important, but not always pursued, especially in economic boom times, when the pressure is on to get the facility built and open quickly, regardless of cost," Heffron said. "In a down market, keeping the costs to a minimum and bringing projects in under budget can be vital.
        "Companies are already outsourcing more and more of their project management and construction oversight work to outside consultants," he continued. "That trend will deepen as project managers-plus bring tax and accounting skills to segregate costs, with tax savings of 2 to 10 percent, [making] new construction projects even more efficient."

Blue Chip Survey: Rebound
Will Begin in First-Quarter 2002

Looming above all those issues is the question of how long the recession will hold.
        Not long, according to the closely watched Blue Chip Economic Indicators (www.bluechippubs.com). The consensus among the 51 prominent economists surveyed in the most recent Blue Chip poll is that the economy will begin righting itself sometime in first-quarter 2002. The Blue Chip survey group predicted a first-quarter 2002 GDP growth rate of only 0.5 percent, but pointed toward a more robust 2.6 percent second-quarter 2002 growth rate.
        In addition, the current recession will be remembered as a very mild one - at least if the Blue Chip projections hold. U.S. GDP will decline by 1.9 percent in fourth-quarter 2001, the Blue Chip report predicted. By comparison, the 1990-91 recession's weakest period was fourth-quarter 1990's 3.2 percent GDP drop.
        Zell thinks the rebound won't begin until mid-2002, but will then continually pick up speed throughout the year, he told his Los Angeles audience.
        The federal government's economic stimulus package "will play a major role" in the economic turnaround, Zell contended. "We have coming at us a financial stimulus tsunami of major proportions," he said.
        Mortgage bankers, on the other hand, are already reporting a resumption of demand, even with tighter credit standards, according to a recent Mortgage Bankers Assn. of America (MBAA at www.mbaa.org) survey.
        In fact, the $18.7 billion in commercial and multifamily real estate loans that mortgage bankers originated during third-quarter 2001 was actually higher than the $17.7 billion they originated in second-quarter 2001. And third-quarter 2001's $18.7 billion in originated loans was considerably higher than third-quarter 2000's $14.1 billion.
        Roughly one-third of surveyed bankers did report a drop in loan demand after September 11th's attacks. "But most of those reported that loan volumes had since rebounded, and indications are that volumes for the fourth quarter were approaching or exceeding pre-September 11th levels," the MBAA reported.