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. She is president of the Hamilton Securities Group Inc., a Washington real estate investment firm. Following are excerpts from the interview. Additional excerpts appeared in the Sept. 28 edition and a final installment will be carried next week. MMP: Who are the new real estate entrepreneurs going to be? Are they tending to come from our recognizable real estate companies? Fitts: It's a very different story in multifamily than it is in commercial. Much of the commercial world has gone through a bull market in the last 10 years, when people were very focused on assets and their location. In that world, the winner was the trader. When you move into an information age, the value of location, location, location really does diminish. It's going to be a far less predictable environment. It's no longer a matter of grabbing a bunch of assets and holding on while their value goes up. Now success requires superior information and analysis.

The leadership of the commercial real estate industry has a couple of major strikes against it in this new ballgame. Their personalities were very conducive to a bull market. They don't find the new environment as challenging. It doesn't whet their appetite. I have a partner at Hamilton, who found real estate in the '80s boring. But real estate in the '90s fascinates him. He finds it not only analytically challenging, but there is a basis now for building an important, useful business that will change people's lives in a very positive way. So now, real estate excites him. From what I've seen, the current leadership in commercial real estate is either too embroiled in workouts has done too well and wants to retire or finds sophisticated analysis not to its taste. The people who I think will institute these changes are really a younger generation. MMP: Coming out of what type of companies? Fitts: Coming out of several areas. They're coming out of the real estate side, but they're also coming out of other areas as well. Think of it this way: Right now, there are very few large multifamily companies. The industry is surprisingly diverse in ownership. You can only identify about 15% of the ownership in this country. We call the other 85% the missing mass, akin to the black hole theory. The largest owner/manager in the country owns surprisingly few units. Now imagine if the largest owner/manager went from 100,000 or 150,000 units to 500,000 units. Now factor in the drop n costs in technology and telecommunications, which will permit us to get the home hooked up for data processing. The chairman of a company with 500,000 apartment units, can say, Now all of these people, my 500,000 or 750,000 clients (and that's the size of a city) are not my tenants. That's my market. Let's say we've gotten a given point of computer literacy. How about if I put all those 750,000 people on-line? What kind of information can I learn from those people that I can use to sell them additional services? Imagine what else can be done, 10, 20 years from now as this occurs. MMP: What will this do for housing availability? Fitts: I think it will improve the availability and the quality of "smart" housing for the moderate-income class. Scarlett O'Hara had quite a house, as we all know from watching "Gone With the Wind." Tara was really something, but remember, Scarlett didn't have indoor plumbing, she didn't have a VCR, and I would argue that even though she had more square footage, and it was certainly more grand, my house, which is much smaller, and not as grand, is much smarter. And I would far prefer my house to Tara. MMP: What about low-income people? Fitts: I think the challenge has very little to do with real estate. You hear this debate about the rich getting richer, the poor getting poorer. Everybody's missing the fundamental issue: In an information society, the literate get more literate faster and the illiterate just stay behind. The differential between them widens. Technology can improve our ability to produce things at a lower cost. But if the illiterate are not made literate, then they don't have jobs.

They're going to have crime in their neighborhoods, it's going to make it really difficult for the poor to afford a quality way of life. The problem is not a housing problem. The problem is, how do you bring that population back into the circle? And it's absolutely critical to the greater whole that we do that. Technology bodes well for everybody, but the timing of when it benefits people varies. It benefits the literate much faster than the illiterate.

As a society, we are not doing as good a job as we should of saying, hey, this is a structural problem, and we have to address it in a structural way.

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