Real estate investment trusts rode a roller coaster throught the 1970s. This decade they seem willing to settle for something slow but steady.
A hot item in the early 1970s, REITs grew from almost nothing in 1968 to a $21 billion industry in 1974. Building was booming, and real estate investment trusts were rolling. Then in 1974 the boom went bust and so did some of the trusts.
"I think of a lot of lessons were learned. Now we have good, in-place, proven management that went through the bad period and came out on the other side," said Willis Andersen Jr., president of the National Association of Real Estate Trusts. "We're a much smaller and more manageable industry."
The experience in the Washington area has been better than that of the nation as a whole, however. Real estate investment trusts in the Washington area include American Realty, Federal Realty, Hotel Investors, Mortgage Investors of Washington, Riviere Realty, B. F. Saul Real Estate Investment Trust and Washington REIT.
Washington-area REITs generally were able to buck the book-and-bust cycle of the REIT industry as a whole and now still do better than real estate investment trusts in other parts of the country, Washington REIT President Franklin Kahn said.
Speaking of his own REIT, Kahn said it has been successful because "we buy prime properties in the best locations, and we happen to be in the soundest area in the country" for real estate. The economic stability of the Washington area and its strong real estate market make it a choice location for a REIT, he said.
Similar to mutual funds, REITs were created by Congress to allow smaller investors to invest in large, highly profitable commercial and residential real estate development.
The investor could participate in financing a shopping center or apartment complex by buying shares in a real estate investment trust, and the shares were easier to get rid of when the investors needed cash than a piece of property might be.
The trusts' profits were tax-free as long as 90 percent of the earnings were passed along as dividends to investors, which made them a high-yield investment. (The percentage that must be passed on has since been raised to 95 percent.)
In their earlier incarnation, the trusts participated largely through making mortgages available to developers at higher rates than charged the trusts when they borrowed the money from banks. When the building boom collapsed and developers began defaulting on mortgages, many trusts found themselves heavily indebted without the resources to pay.
The banks were patient in most cases, willing to wait to protect the large loans they had made to the trusts. Some trusts were able to hang on by restructuring debts.Others were less lucky.
Over time, the numbers were not enormous. There were 13 bankruptcies or reorganizations out of approximately 225 trusts. Others merged or went into other types of business. But the combination of the troubles that the survivors had hanging on and the bankruptcies were enough to wash away much of the luster the trusts once had.
Chase Manhattan Mortgage & Realty Trust, which had been the fastest-growing firm in the industry at one point, field for bankruptcy in 1979 owing more than $200 million. Locally, NOVA Real Estate Investment Trust of Falls Church filed for reorganization under Chapter 11 of the federal bankruptcy code last October.
According to research by the trade association for real estate investment trusts, those are the only bankruptcies or reorganizations since the beginning of 1979. On the the other hand, since 1979 11 new trusts have been formed -- a measure of renewed attractiveness.
The industry today looks much different from what it was before and after the problems that beset it. For one thing, as Andersen said, it is smaller. From a high of approximately 225 trusts, it is down to about 200. From assets of $21 billion, it is down to assets of approximately $10.2 billion.
The shape of the industry is different, as well. From a highly leveraged industry in which debts outweighed assets and in which many of the trusts' holdings were mortgages, it has changed to a more fiscally conservative industry in which trusts tend to own property rather than paper.
"After the '73-'74 crunch, it was perceived that equity trusts [those that emphasize property owernship] were better placed to withstand the rigors of the market," said Andersen. Andersen, who is chief executive officer of Rampac, a large Oakland, Calif., trust that invests only the western state, views the industry as essentially recovered from the turmoil.