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Cycles & Comparisons : Kondratieff's Theory Holds That Long-Term Expansion, Contraction Governs Construction of Capital Plant.

April 06, 1986|RUTH RYON | Times Staff Writer

Halley's Comet is like the commercial/industrial real estate market.

Like grasshopper plagues, poets' creativity, the melting of glaciers. Even political landslides and the number of infants born each day.

All fluctuate in cycles.

Trouble is: Cycles are not exact. As Fred Case, a UCLA professor, observed: "Nobody seems to be able to precisely forecast a turn of events."

Jay W. Forrester, a professor at the Massachusetts Institute of Technology, in a telephone interview, cited the Kondratieff, or Long-Wave, Theory as evidence that another major recession might occur within the next three years. Kondratieff, a Russian economist of the 1920s, suggested what Forrester described as "an orderly proceeding" that led to depressions in 1830, the 1890s, and--after Kondratieff's time--in the 1930s.

The Kondratieff Theory "consists of major expansions and contractions in construction of capital plant, with related changes in debt, prices and interest rates," Forrester wrote in a paper on the subject. By contrast, he defined "ordinary business cycles" as having "peaks, some three to seven years apart." So how deep a recession does he predict? "Well, you know that the farmers are already in one as severe as the 1930s," he said. As for real estate? "Every recession since 1960 has been more severe than the one before, so I expect the next two recessions to be even more severe."

Forrester agrees that a major recession cannot be predicted with precision. "After all," he says, "we're talking about recessions 45 to 60 years apart."

Shorter cycles haven't been forecast exactly, at least on a regular basis in recent years, either, and Al Gobar, who heads a Brea real estate consulting firm, explained why:

There is a seven-year commercial-construction cycle, but there is "nothing mystical about it," he said. "It takes 3 1/2 years to get overbuilt and 3 1/2 years to start building again."

But are the numbers precise? "Hell no," he answered. "You must look at causes and effects. Otherwise, it's like saying, 'It's good that you have ears, because then you have a place to hang your glasses.' "

Like the rainstorms and high surf that signaled the possible return to Southern California earlier last month of El Nino (the warm ocean current that disrupted weather patterns all over the world three years ago), there are several warning signs of a potential downturn for commercial and industrial real estate developers.

In many U. S metropolitan areas, including Los Angeles, there already is an abundance of office space. In many places, there are too many hotels. In some, strip shopping centers have replaced gas stations on every corner. And the industrial market, especially research-and-development office space in some locales, is almost as bad.

The situation isn't the same everywhere. As Walter Silber of Brentwood Financial Corp., a West Los Angeles-headquartered real estate syndication company, put it, "Cycles vary from one locale to another."

Small shopping centers are overbuilt in some places, but his firm is expanding one in Atlanta, and he is looking at the small shopping-center market in Portland, Ore., where he says, "it's an idea whose time has not yet come."

Also, consider New York, where office vacancies are surprisingly low for a large city. Developer Donald Trump's engineering staff is completing plans for a 150-story skyscraper in Manhattan. That's 40 stories higher than the current leader, Chicago's Sears Tower. (This coming July's issue of Popular Mechanics will also relate plans for a 210-story Chicago World Trade Center and a proposed 500-story tower.)

So, the short-term construction cycle can vary according to project type and geographical location, but it generally works the same. C. Wesley Poulson, who retired last summer as head of Coldwell Banker and has since formed a new investment group, said, "As long as we have a free economy, we'll have these swings of the pendulum."

Asked why the swings in construction seem to be so radical, William Harvey, senior vice president of Wells Fargo Realty Finance in Santa Monica, said, "There is overreaction. First comes concern that a market is overbuilt. So then an underbuilt situation is created."

Andrew Kane, a partner in the Los Angeles office of Arthur Andersen & Co., a certified public accounting firm, put it simply: "The bottom line is supply and demand. It's a function of economics."

Gobar explained how the construction cycle works:

"You overbuild, then lenders stop making loans, construction stops, rents go up, there are no vacancies, and building resumes. A couple projects are built, then a couple more. Then lenders make loans willy nilly. Projects get bigger and bigger before things hit the fan. It's easy to get this started, hard to get it stopped."

Developers, described by some developers as "opportunistic" and others as "entrepreneurs with lots of--maybe, at times, too much--confidence," will build as long as they get the financing.

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