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Tax Revision Seen to Bring Investment Back to Basics

June 08, 1986|JERRY DeMUTH | Special to The Times and DeMuth is a Chicago-based free-lance writer. and

CHICAGO — The commercial real estate industry is undergoing a shake-up that will continue into 1987, a developer told a real estate conference here.

"This industry is going back to the basics," said John M. Nelson IV, a director of First Winthrop Corp. and a general partner in Winthrop Financial Associates, both of Boston. "There will be a wash-out of a lot of marginal producers."

But the tax law change proposals that are causing many to turn away from real estate, are creating real opportunities for others, he and other speakers insisted.

"Real estate will remain a viable, long-term investment," Nelson told investors and developers attending the two-day conference on strategic real estate, which was co-sponsored by the National Real Estate Development Center and the National Multi Housing Council. "Real estate, over the longterm, will outperform any other investment."

Richard G. Wollack, president and director of Consolidated Capital Cos., Emeryville, Calif., said there are many similarities between 1986 and 1974-75, a period now viewed as having been the best time to invest in real estate. The only dissimilarity, he maintained, is today's low inflation which is "a positive because our expenses are not going up."

With the tax advantages gone, the underlying economics will become the most important thing, Neil G. Bluhm, president of Chicago-based JMB Realty Corp., said.

"The overbuilding will slow down," he said. "Past investors will do better and so will future investors because there will be less competition from tax sensitive investors."

The tax proposal will even create a rich market for rental multifamily buildings as it causes rents to soar, Bluhm and other speakers maintained.

"With rents going up," said Jerry M. Reinsdorf, chairman, chief executive officer and co-founder of the Balcor Co., Skokie, Ill., "this will be a better time for pension funds to invest in real estate."

However, rising rents could cause a revival of the rent control movement, warned Stephen P. Jarchow, a partner and vice president of Lincoln Property Co., Foster City, Calif., and Allen Cymrot, founder and chairman of Kemper/Cymrot Inc., Palo Alto, and chairman-elect of the National Multi Housing Council.

Jarchow said his firm, which is the nation's highest-volume apartment builder, "likes California a lot," especially Los Angeles and the Bay area. "We also like the Pacific Northwest, and the Washington, D.C.--Maryland area has been particularly good to us."

Rental Market 'Very Spotty'

Lincoln also was looking for opportunities to purchase industrial warehouses in the Los Angeles and Bay area, he added.

Dennis H. Alberts, president of Trammell Crow Residential Co., Dallas, said that rental markets are "very spotty."

"There are huge sections of the country where it is good to build, primarily in areas where tax-exempt bonds were not sold, such as in the upper Midwest," he said.

On the West Coast, Trammell Crow is attracted to Los Angeles, San Diego, San Francisco and Seattle, and expects to build as many as 4,000 units in those markets in the next couple years, he said.

Although, it is ignoring Texas, "we would consider buying in some of the softer markets," he added.

Not Many Buyers

But there aren't many buyers of existing properties, at least of distressed properties, which is good, said Albert W. Kruger, first vice president for acquisitions at Angeles Real Estate Corp., Los Angeles. "There are more sellers than buyers, so I think prices will be good," he said. "There were more buyers before, and that created the problems we had."

However, buyers of distressedproperties must make sure that rent and prices have bottomed out before committing themselves to a price, cautioned David Jaynes, senior vice president of Consolidated Capital Corp., Dallas,

"I wait until the lender gets the property back," he said, explaining that he then sometimes buys it for less than the amount of financing.

Strong Negative View

Ridiculing those who are waiting for a tax bill to be approved before investing in real estate, Cymrot, a leader in the syndication field, said a tax bill will be approved and signed by fall, and then work will begin in January on new tax legislation.

A strongly negative view was presented by Samuel Zell, founder and chairman of Equity Financial and Management Co., Chicago-based owner of a national portfolio of residential and commercial properties.

Declaring today's real estate market "a major disaster," he said there was "an oversupply in almost every single market" with no hopes for a rapid recovery.

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