Five Decades of CRE and NAIOP
By: Margarita Foster, vice president, knowledge and research, and editor-in-chief, Development magazine
A Timeline of Key Industry and Advocacy Events
1970s: Birth of the Modern CRE Industry
• The modern commercial real estate industry is born in the 1970s with the creation of the first publically owned real estate funds and the start of syndication — the pooling of funds to find, acquire and operate properties.
• The Employee Retirement Income Security Act (ERISA) of 1974 requires pension funds to diversify, setting the stage for greater capital flows to real estate.
• In 1974, the association scores its first legislative victory on Capitol Hill, when qualified industrial parks are deemed exempt from reporting requirements in the Interstate Land Sales Full Disclosure Act. This exemption saves industrial park developers millions of dollars by eliminating the need for time-consuming and costly applications, forms and permits.
• The decade is marked by the OPEC oil embargo against the U.S., which results in high energy prices, inflation and record-high interest rates.
• Recession takes hold in the middle of the decade, and industrial and office park development activity declines.
1980s: Industry Expansion, Then Contraction
• The Economic Recovery Tax Act of 1981 (ERTA) heavily benefits CRE by lowering ordinary income and capital gains tax rates and introducing the accelerated cost recovery system, improving the rate of return on CRE investment.
• Syndicators begin to package and sell off real estate losses as tax shelters.
• The savings and loan industry makes riskier CRE loans to achieve higher returns, moving real estate ownership from individuals to the books of institutions.
• Foreign investors from Japan — as well as Canada, Germany, the U.K. and other countries — invest heavily in U.S. real estate, paying especially high prices for trophy assets in major markets. Valuations skyrocket, not because fundamentals are improving, but because investors are outbuying one another.
• The first educational program offering a master’s degree in real estate development is founded in 1983 at MIT.
• NAIOP leads legislative efforts to defend the industry against the Tax Reform Act of 1986, which eliminates many of the 1981 tax policies that favored real estate investment.
• The Tax Reform Act of 1986 thwarts the CRE industry, mostly through the repeal of ERTA rules; less favorable accounting treatments are applied to properties that are significantly overvalued.
• On October 19, 1987, the Dow Jones industrial average loses $500 billion, 22 percent of its value, in one day.
• In 1988, NAIOP hires its first lobbyist and intensifies federal advocacy efforts in response to the devastating 1986 Tax Reform Act.
• By 1989, the S&L industry collapses.
1990s: CRE Clean-up and Reinvention
• The short recession of 1990-91 affects the CRE industry disproportionately, as lending institutions delever from CRE projects. A credit crunch in the CRE industry and sky-high vacancy rates result in significantly reduced development activity, setting the stage for declining vacancy rates and rebounds in CRE values throughout the decade.
• The Resolution Trust Corporation is in full swing disposing of undervalued assets on the books of thrift institutions. Assets are sold at a fraction of their assessed values and “workouts” — the complex task of determining real estate values and assigning ownership and accountability to numerous parties — become the thing.
• NAIOP is proactive in helping to find solutions to the “capital crunch,” and is an active partner in the Economic Growth Alliance. This industry coalition, which includes the International Council of Shopping Centers and the National Realty Committee (later the Real Estate Roundtable), is dedicated to generating broad-based support to stabilize real estate values.
• Numerous REITs are formed to generate capital for CRE development and acquisitions, since traditional sources are not eager to lend.
• Commercial mortgage-backed securities (CMBS) are created. This new but opaque financial instrument enables the securitization of mortgage debt.
• Many developers become fee-oriented, focusing on the development process as an area of specialization in addition to/in-lieu of building and operating their own assets.
• As the CRE industry strengthens in the mid-1990s, NAIOP advocates for the relaxation of passive-activity loss rules that are part of the 1986 Tax Act, which eliminated tax shelter provisions for CRE. Passive loss relief is achieved, enabling CRE professionals to deduct certain real estate losses from ordinary income, but only for entities deemed “active” in a real estate business.
• The industry emerges from what CRE professionals describe as “a recession for the country but a depression for the real estate industry.”
• The quickly emerging internet technology sector generates increasing demand for space, while capital becomes abundant as the Glass-Steagall Act is repealed, enabling commercial banks to venture into risker investment banking activities.
2000s: The Tech Bubble, 9/11 And the Great Recession
• The rapid rise and decline of many technology companies results in the dot-com bubble that bursts in spring 2000, as the Nasdaq composite loses $1 trillion in value over just one month.
• Roughly 18 months later, as jobs and economic growth begin a modest recovery, the Sept. 11, 2001, attacks occur.
• NAIOP advocates for the Terrorism Risk Insurance Act of 2002 (TRIA), which requires insurance companies to offer coverage for incidents deemed to be acts of international terrorism.
• NAIOP supports a provision in the Brownfields Revitalization and Environmental Restoration Act of 2002 that authorizes funding to assess and clean up brownfields properties; exempts contiguous property owners, prospective purchasers and others from Superfund liability; and authorizes funding for state response programs.
• Building security, vulnerability and liability take center stage for the CRE industry. Interest rates decline precipitously and the 10-year Treasury rate settles at about 4 percent between 2003 and 2007.
• Institutional investors seek higher risk-adjusted returns by investing in CRE, signaling an appetite for reliable cash flow generated by creditworthy tenants.
• The housing bubble bursts and residential mortgage defaults skyrocket, eventually reaching more than 10 percent of outstanding residential mortgage loans. Banks lose tremendous amounts of money, resulting in their eventually lacking the reserves required to meet liquidity requirements.
• The Dow declines by $1.2 trillion on September 29, 2008, on news that Congress did not pass a bill to bail out banks from their liquidity shortages.
• Lehman Brothers collapses, triggering a global financial crisis exposing the depth and breadth of the subprime mortgage contagion affecting securitized mortgage assets; credit default swaps; institutional investors; and commercial, investment and central banks worldwide. Two and a half million jobs are lost and vacancies rise into the double digits across most real estate asset classes.
2010s: CRE Becomes a Favored Asset Class
• The economy slogs through a long, slow recovery, with GDP rates between 1.6 and 2.6 from 2010 through 2016.
• The massive Dodd-Frank Wall Street Reform and Consumer Protection Act is signed into law in 2010, one outcome of which is a general tightening of consumer and business lending.
• Equity and debt are available; jobs are steadily added to the economy; and construction costs are low, due largely to a lack of competition from the residential sector, yet developers are careful not to overbuild.
• NAIOP successfully advocates for reauthorization of TRIA in 2014. This law’s expiration would have threated transaction activity and ownership among CRE developers and investors because of disruptions in the availability of property and casualty insurance that offers terrorism coverage, a key requirement for financing major projects.
• NAIOP support helps lead to the passage of the Fixing America’s Surface Transportation (FAST) Act, a long-term transportation bill, which President Obama signed into law in December 2015. The act dedicates funding to U.S. highways and transit systems for a five-year period.
• E-commerce takes off, shifting much retail activity from the mall to the fulfillment center, moving industrial real estate properties into the investment mainstream.
• A provision of the U.S. EPA’s federal Clean Water Rule, which aims to clearly define which waters are federally protected, results in more confusion than clarity. NAIOP argues in its 2015 comment letter that erosional features such as ditches and settling basins should be explicitly exempt from the rule, as they have never before been considered federal waters. The EPA meets NAIOP halfway with the erosional feature exemption, but leaves the door open to field determinations.
• The Protecting Americans from Tax Hikes (PATH) Act of 2015 results in a number of key outcomes that affect the CRE industry. Key provisions that were once temporary and subject to renewal every one or two years are either made permanent or extended for longer periods, providing vastly increased predictability for investment decisions.
• CRE’s appeal to institutional and individual investors continues to grow, with more than $2.5 trillion in CRE sales volume transacted between 2010 and 2016.
• The industry receives a formal nod from the Global Industry Classification System when it creates its 11th investment sector exclusively for real estate, moving it from the “financials” sector.