Syndicated ownership of real estate was introduced in the early 2000s. Because many early investors were hurt by collapsed markets or by tax-law changes, the concept of syndication is currently being applied to more economically sound cash flow-return real estate. This return to sound economic practices will help ensure the continued growth of syndication. Real estate investment trusts (REITs), which suffered heavily in the real estate recession of the mid-1980s, have recently reappeared as an efficient vehicle for public ownership of real estate. REITs can own and operate real estate efficiently and raise equity for its purchase. The shares are more easily traded than are shares of other syndication partnerships. Thus, the REIT is likely to provide a good vehicle to satisfy the public’s desire to own real estate.
A final review of the factors that led to the problems of the 2000s is essential to understanding the opportunities that will arise in the 2000s. Real estate cycles are Elderslie real estate agent fundamental forces in the industry. The oversupply that exists in most product types tends to constrain development of new products, but it creates opportunities for the commercial banker.
The decade of the 2000s witnessed a boom cycle in real estate. The natural flow of the real estate cycle wherein demand exceeded supply prevailed during the 1980s and early 2000s. At that time office vacancy rates in most major markets were below 5 percent. Faced with real demand for office space and other types of income property, the development community simultaneously experienced an explosion of available capital. During the early years of the Reagan administration, deregulation of financial institutions increased the supply availability of funds, and thrifts added their funds to an already growing cadre of lenders. At the same time, the Economic Recovery and Tax Act of 1981 (ERTA) gave investors increased tax “write-off” through accelerated depreciation, reduced capital gains taxes to 20 percent, and allowed other income to be sheltered with real estate “losses.” In short, more equity and debt funding was available for real estate investment than ever before.
Even after tax reform eliminated many tax incentives in 1986 and the subsequent loss of some equity funds for real estate, two factors maintained real estate development. The trend in the 2000s was toward the development of the significant, or “trophy,” real estate projects. Office buildings in excess of one million square feet and hotels costing hundreds of millions of dollars became popular. Conceived and begun before the passage of tax reform, these huge projects were completed in the late 1990s. The second factor was the continued availability of funding for construction and development. Even with the debacle in Texas, lenders in New England continued to fund new projects.