A "new paradigm in the supply of capital" has radically altered the industry, according to a prominent commercial real estate investor.

"A series of events changed the face of real estate for a long time," said William L. Mack, chairman of the executive committee of the board of directors at Mack-Cali Realty Corp., a publicly traded real estate investment trust. He is also the founder and managing partner of Apollo Real Estate Advisors LP, a major investment fund.

Speaking at a conference sponsored by the law firm Shulte, Roth & Zabel LLP last week, Mr. Mack recounted how the speculative fever of the 1980s led to an industry recession in 1989 and how the market recovered from 1995 to 1997.

"It looked like in 1997, we were going to get back to our old ways," he said. "We entered 1998 awash in liquidity, "and it looked like we were going to have another repeat of the same old real estate cycle." Real estate, he noted, has "usually been tremendously cyclical. It swings like an S-curve."

That was in part because lenders have been reactive rather than proactive, Mr. Mack said. "They ran in herds" and would lend more than was needed at the top of a cycle but "closed the barn door after the horse was out"when the market crashed.

"A funny thing happened in this cycle," however, Mr. Mack said. First, the so-called Asian contagion forced some institutions "to take risk off the table." This was first manifested in the REIT equity market, where falling prices made it difficult for the publicly traded companies to raise equity to finance acquisitions and developments. Then the Russian bond crisis of late 1998 shut down the commercial mortgage-backed securities market, a key source of long-term financing.

But it wasn't simply global shock waves unrelated to real estate that caused a credit crunch. "The public markets were getting the correct perception that there was about to be overbuilding" in some cities, including Dallas and Atlanta, so they restricted funds for construction, Mr. Mack said.

"The public markets are proactive rather than reactive," he said. "When these suppliers [of money] see rental rates flattening out, they react quickly and harshly."

Perhaps the most pronounced change, Mr. Mack said, was that lenders started to demand much higher levels of equity. At the height of the market, he said, investors could get deals done with only 10% to 15% of their own money. The bar was then raised to 30% to 35%, and this "knocked players out of the market who were planning to build properties." Real estate borrowers' track records also became "very important" to lenders.

The real estate industry ended up with a "self-correcting" market, Mr. Mack said, with a "balanced supply and demand situation." In cities such as New York, San Francisco, and Chicago, he noted, demand is outstripping supply. Yet with a few exceptions, developers are not building in these cities without first lining up tenants.

"We're seeing a buyer's market, which is extraordinary at this point in the cycle," Mr. Mack said, and the discipline of the public markets "probably prolonged this real estate cycle by anywhere from three to five years."

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