Real Estate Faces Bleak Year

`THINGS are so bad out there that rent control starts to sound good,'' jokes Harold Brown, a beleaguered Boston real estate magnate. As the owner of 10 million square feet of commercial office space, and 3,000 apartments, Mr. Brown has come to symbolize the dire condition of New England's real estate market. He has defaulted on more than $200 million in loans and is busy negotiating with creditor banks.

In the Midwest, real estate is also faring poorly. Even in California property values are slumping. But the United States market is most troubled in the Northeastern and mid-Atlantic states, where the large financial-services sector has been contracting since the October 1987 stock market crash. In New England, setbacks for the defense and computer industries have compounded the economic weakness.

The collapse in prices and rents also stems from overbuilding in the 1980s during which the influx of investment capital outpaced demand. Now, many projects are not generating enough cash to pay off their loans.

Last weekend, 50 local banks drew big crowds to a ``Massachusetts Bank-Owned Real Estate Show,'' an innovative effort to lure buyers for hundreds of foreclosed properties.

Nonetheless, Brown sounds an optimistic note. He told a recent gathering of Boston-area property managers that the market is ``poised for a major upswing'' once the recession ends. But he acknowledges that this may not happen soon.

``The question is, can we survive till the upswing comes,'' he says. Many observers say an upturn is unlikely before 1992.

``This will be a tenant's market for the next couple of years,'' says William Wheaton, an economist with the Massachusetts Institute of Technology's center for real estate development.

Of the six New England states, Maine has not fared as badly as Massachusetts, while Vermont is in the best shape in the region, says Karl Case, an economist with the Federal Reserve Bank of Boston. In New Hampshire's skiing region and other scenic areas where people buy second homes, the market has fallen dramatically.

Mr. Wheaton uses office vacancy figures to tell the story of how the overbuilding occurred and how the market will recover.

In 1981, only 2 percent of Boston's office space was vacant, while 10 percent would be considered ``normal,'' he says. ``The market needed a boom'' and got one. Pent-up demand helped property values soar as the region moved out of a recession and new construction prospered. But the building didn't stop, partly because banks kept lending when they should have adjusted their underwriting policies, Wheaton says.

With corporate borrowers turning to investment banks for more of their financing, commercial banks had to lend somewhere, and real estate seemed to be a good option. Savings-and-loan associations, allowed for the first time to lend for commercial development, added their share of fresh capital.

Boston's office vacancy rate has jumped from 15.7 percent last summer to 17 or 18 percent today, Wheaton says. Although this is near the national average, rents have been falling dramatically.

Looking ahead, he predicts the rate will hit 19 percent this year, but as the economy recovers demand will pick up, absorbing 2 million to 3 million square feet of office space in both 1992 and '93. The outlook for industrial space is more bleak, Wheaton says.

For the home market, ``the bottom is still about a year away, but it will recover.''

Builders will be more conservative in the 1990s, says Ron Dion, president of R. M. Bradley & Co., a Boston real estate firm. ``We are going back to demand-driven production.''

Mr. Dion says real estate in the 1980s drew capital not only from banks and S&Ls, but from investors seeking a tax shelter. A 1981 law allowed depreciation of multifamily housing to be written off over a 15-year period instead of 30 years. The law is one reason there's a ``four-year supply of condominiums floating around here,'' Dion says. In 1986, the tax incentive was removed.

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