High vacancy rates. Lower yields. Tough controls from local governments. In the real estate business, such things are supposed to spell trouble for investors. Instead, investment money has been flowing into commercial real estate at record levels and the sources of money are more diverse than ever.
''Despite very high vacancy rates, we are continuing to have high levels of new construction,'' says M. Leanne Lachman, president of the Real Estate Research Corporation, a Chicago-based consulting firm. ''These high levels will continue into 1985,'' Ms. Lachman said in an interview during a recent visit to Boston. Shortly before the visit, she had completed a draft of the RERC study, ''Emerging Trends in Real Estate,'' sponsored by Balcor/American Express Inc., the real estate division of the giant financial services company.
''The old rule of thumb was that a 5 percent vacancy rate was acceptable,'' Ms. Lachman said. ''That rule of thumb no longer applies. Now it's about twice that.'' In office buildings, the vacancy rate is a little higher right now, about 13 percent.
These vacancy rates are largely caused by money, Lachman said: Because so much money is flowing into real estate, construction remains high for office buildings, apartment complexes, and multi-use urban projects like Boston's Copley Place (where there are retail shops, offices, and two hotels). High vacancy rates are acceptable for now, she believes, even though they result in lower returns to investors.
Since the end of 1981, yields on commercial real estate investments have declined steadily. The return this year is about 13 percent on prime properties and 15 percent on riskier ventures. This compares with a median of about 18.5 percent in December 1981.
''People are having to hold property much longer to get a decent return,'' Lachman said. ''But that's a stabilizing thing for the market.''
She says stability is important for some of the newer sources of real estate capital, particularly pension funds. Pension funds have been the biggest source of new money for commercial real estate, she observed. And individuals, investing through limited partnerships, have helped syndicators pump more than $ 25 billion of new money into real estate.
Other sources of money include savings-and-loan associations that have become aggressive lenders since deregulation, commercial banks looking for ways to increase real estate loans to help offset fewer business loans, mortgage-backed securities, and insurance companies. One of the few groups with less participation is foreign investors, kept away by the strong dollar.
Lachman says these new sources of money are expected to remain interested in real estate for the next few years, keeping construction levels and vacancy rates high - at least until yields drop too far. ''The point will come when yields are too low and the risks too great,'' she predicted. Then, developers will stay out of the market until demand and yield pick up again.
Interestingly, she says, three of the most attractive cities to real estate investors - Boston, New York, and San Francisco - have the toughest local government land-use restrictions and require a much longer approval process than ''pro growth'' cities like Houston and Denver. Investors, lenders, and developers surveyed for the RERC report were the most bullish about these cities , plus Los Angeles, and were most negative about Houston and Denver.
''The cities that are the most pro-development end up the most overbuilt,'' she said. ''Real estate developers usually come out against government control. But it does improve the supply-demand situation.
''In mid-1984, every city with vacancy rates above 15 percent was in the Southwest. There's been a rediscovery of the Northeast by investors.''
Investors looking for yield on office buildings, for example, like the fact that Boston, New York, and Washington, along with San Francisco and Los Angeles, have the highest rents in the country.
Not all interest in real estate investment is confined to commercial buildings, Lachman said. After several years when ''smart'' families insisted on owning their homes, ''rental now makes good economic sense.'' Until the mid or late 1970s, people often bought and sold homes within a year or so, using the profit from the old home to make a big down payment on the new one.
''Now, just to cover closing costs, you have to hold a home three to five years,'' Lachman said. ''So people who anticipate transiency within five years are more often choosing to rent.'' Renting makes even more sense, she adds, if the additional money that would have been used to build equity in a house or condominium is invested. Lachman herself is a renter who invests, not surprisingly, in real estate.
''I get a good return and my tax deductions,'' she said.
The renewed interest in renting means ''developers are more likely to do better by building an apartment complex and selling it to syndicators'' than they could with individual houses, she observed. ''A lot of home builders say the profits have gone out of houses.''
There are developers, however, who ''are building small, well-designed, efficient houses and are making a lot of money. ... But I don't think enough developers are building this kind of product.''