Fusion CMBSs, UPREITs, paper-clip and paired share REITs, conduits and opportunity funds--all these are phrases, words or acronyms that are common in today's real estate lexicon but were not around a decade ago. This evolution in real estate industry vernacular reflects deep and fundamental change in the industry itself.

Illustration by Peter Nagy

The Setting
During the early part of this decade, the real estate industry throughout the United States and, in particular, in Southern California, went through wrenching changes. Optimism arising from the prolonged upswing in the late '80s, aggressive lending by the commercial banks and the S&Ls, foreign investment in U.S. real estate and buoyant housing markets came rapidly to an end. The tax law changes of 1986, the peace dividend and a national recession caused marketwide reductions in the demand for housing and commercial space, dramatic declines in real estate asset values and rapidly growing portfolios of troubled real estate loans. The depth and duration of the decline was greater than most foresaw. For example, 32 of 35 separate annual forecasts of multi-family and single-family housing starts in California over the five years from 1989 to 1994 overestimated what actually happened in the subsequent year.

The result of this downturn was a virtual drying up of traditional sources of equity and debt capital. Most investors in real estate, including homeowners, found themselves struggling to maintain control of their homes and investments as asset values fell below the face amount of the debt on homes and investment property. Most lenders, particularly regulated lenders, sought to reduce their existing performing real estate loan portfolios and sell off troubled loans to maintain sufficient regulatory capital. Institutional investors, for the most part, reduced portfolio allocations as they wrestled with poorly performing directly owned investment real estate or illiquid, poorly performing real estate funds.

Summer '98 Table of Contents | Page 1 | Page 2 | Page 3