Former Federal Housing Commissioner (1989-90) C. Austin Fitts sketched a picture of the commercial real estate finance industry of the future in an interview with The Mortgage Marketplace. Fitts is president of the Hamilton Securities Group Inc. Following are excerpts from the interview. Additional excerpts were carried in the Sept. 28 and Oct. 5 issues.
MMP: What developments do you expect in commercial real estate?
Fitts: The commercial business is going to be harder in the next decade than multifamily. First of all. demand is going to be strong and steady for multifamily housing. The multifamily business is so underconsolidated that there is a great amount of business to be done consolidating firms. There is also much to be done, given technology, in terms of services you can provide to the information age.
I think the commercial side is going to be more difficult because much of the stock is wholly inappropriate to the information age.
MMP: What's an example?
Fitts: Our company needs a tremendous amount of open space, much more like a newsroom or an investment banking trading floor. You go into many office buildings and they are very beautiful, but they're set up for a different way of life. In the old world, you invested more money in your hard assets than your soft assets. You're going to see companies increasingly want to invest more money in their soft assets. And also commuting patterns will be different.
In our business, for example, I spend more money per month on periodicals and reference sources than I do on rent. We maintain huge data bases that are proprietary to us. We have every investor in real estate or real estate-related securities and their portfolios on relational databases. It requires a tremendoes investments to source this information, which is absolutely crucial to our business. That's part of what we would call our information infrastructure. It's more important than impressive office space.
MMP: But what's going to happen to that office space we have out there?
Fitts: For some built in the last decade, the price is never going to equate supply and demand. The rents are not going to cover the cost. What the commercial stock evolves to over the long run is certainly going to be different than it is now. It will likely be more modest and more spread out because cities are going to have a hard time during this decade. That's going to push demand for office space to be geographically spread out for some time. The leadership of the commercial real estate industry is going to have to spend a lot of time trying to figure out how to integrate the services in those buildings with telecommunications, with fiber optics, with other new technologies.
MMP: Will this prevent the increased securitization of commercial real estate?
Fitts: No, I think it'll happen. It's not yet clear to me in the end whether the most efficient thing to do with commercial real estate is straight securitization or to create companies that access the capital market. I think you'll see both forms. To do securitization requires standardization. In multifamily, you have Freddie and Fannie leading the way. In commercial real estate ... one of the key questions is, how you're going to get that standardization.
MMP: There is a new coalition, led by the National Association of Realtors, that was established to remove barriers to commercial securitization, including problems with standardization. What should its priorities be, especially in dealing with sources of capital?
Fitts: The first priority should be a central clearing-house for market information. The multifamily industry is now seeking federal legislation to assure the collection and dissemination of date for their capital markets.
MMP: What relationship does the federal budget deficit have to real estate finance and how high a priority should reducing it have?
Fitts: A series of Federal budget agreement has been steadily forcing a day of reckoning for real estate. By quantifying the cost of federal tax and credit subsidies to real estate, the budget process is forcing us to look at the substantial social investment we have made in all real estate.
As the deficit requires us to make choices, not surprisingly, real estate subsidies are being substantially cut back. Without these subsidies, the primary reason for real estate to finance differently than other for-profit corporations disappears. The bottom line result: securitization.
Balancing the budget, however, is very important. We need to do three things. First, spend less. Second, save more. And third, increase our productivity dramatically. That last one will dictate that our investments in real estate will wind down from a level appropriate to an industrial economy to a level appropriate to an information economy.