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ORER
/):\ LETTER.^:-*
DrDinniAi
Volume One, Nun ^^C ^ IQ Summer 1987
the University of Illinois
Publicati
AreB_
HERTZBERG — NEWMETHOD, INC. EASTVANDALIA ROAD, JACKSONVILLE, ILL. 62650 DEBUTS
Mar sn
TITLENO. ACCOUNTNO. LOTANDTICKETNO.
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42--SB .W33433220t5«-0R«
"OLLAIN STAYS
01STX3.
CLOTHCOLOR —HEIGHT
es FoUain, theDirector
00 000
tyb est CHARGING INFORMATION SPECIALWORKANDPREP. leOfficeofRealEstate
acr< FRONTCOVER HANDADHESIVE MAPPOCKETPAPER ;archforthelastthree
higl LENGTHWISE MAPPOCKETCLOTH s, willcontinue asDirec-
divl als THRUSEWONTAPE PEXATGREASTLHAIMCIKNNAETSESD FLIONREESIGONFTLIETTLTEERING SRPEEMCOIVAELWTAOTRTKLETAPE tor atleastone more
hav
ill
and NEW ADVISOR
doy imu
I
ty
^i
preHlcteH"abovenormalr \^ii^les Hillwasrecently ap-
therateofreturn inmoni fi- pointedto theORER Advis-
normal rates ofreturn. Ii jiti lef- ory Committee. He is Exec-
marketresults inself-deft 'gl cie len utiveVicePresidentand
Answers forthe firstfu ChiefOperatingOfficerof
(whatcauses seasonaleffects.') areaccumulating Seasonality-Size Effects theChicagoFederalHome
forthe stockmarketanomalies. However, these LoanBank.
answers maynotultimately prove to becorrect. and REIT Efficiency
ORER MOVES
Forexample, there is a tax selling hypothesis
which attempts to explain highJanuary rates of REITs orRealEstate InvestmentTrusts are
return, theJanuaryEffect, incommonstocks. closed-endinvestmentcompanies thatbridgethe TheCollegeofCommerce
This hypothesis is losing favorin theface ofev- gapbetweenstockmarkets andrealestatemar- andBusiness Administration
idencethattheJanuaryEffectisfoundincoun- kets. Sinceshares inthesecompanies are traded is providing the ORER with
trieswithmarkedlydifferenttax laws. There is on stockmarkets, they mightbe expected toex- renovatedfacilities which
anotherhypothesis that attempts toexplain the hibitseasonalrateofreturn anomalies thatare will alsoconsolidate all the
JanuaryEffectby asserting thatmutual fund similarto those ofcorporate stock. realestatefaculty inonelo-
managers move into riskier-smallerstocks in REITprice andreturndatais the onlyready cation. Thenew suite ofof-
Januaryinordertoincrease theexpectedreturn continuedonpage4
ontheirportfolioandthus increase theirexpect- continuedonpage2
.
ORErt Letter Page
continuedfrompage1 Figure 1
sourceofrealestatepricesandreturns basedon
nearlycontinuous trading. Therefore,one source AVERAGE MONTHLY RATES OF RETURN 1962-85
ofinefficiency commonly attributedtoreal estate
15%
markets, infrequenttrading, shouldbe absent
fromREITprices andreturns.
There are basically twotypes ofREITs: mort-
gage REITs and equity REITS. As the names 10%
suggest, theportfolios ofmortgage REITs con-
sist primarily ofmortgages, while the portfolios
ofequity REITs consistprimarily ofequity posi-
tions in real estate projects. Atfirstglance, one
mightsuspect thatthe equity REITs areriskier
andhave higherexpectedreturns than the mort-
gageREITs. Butthereverseis the case. Even
though, it might seem as ifan equity position
wouldexperience more variabihty than amort-
gage position, it may be that something like in-
terestrateriskhas madethemortgageposition -5% - FMAMJ ASONDJ
riskierinrecentyears.
Therearelargedifferences inseasonaleffects
J J
betweenlarge andsmallREITs andbetweenequi-
SOURCE:ORER
ty and mortgage REITs. Figure 1 shows the sea-
sonal patterns in rates ofreturn forthelargest Figure 2
and smallestmortgageREITs, whereas Figure2
shows the same information forequity REITs. AVERAGE IVIONTHLY RATES OF RETURN 1962-85
The January Effectexists foronly the small 15%
mortgage andequityREITs. TheJanuaryEffect
forsmall mortgage REITs is almost 6.5 percent-
agepoints above thatforequityREITs. Howev-
SMALLEST EQUITY REITs
erin both thecaseofmortgageREITs andthe 10%)
caseofequityREITs, theJanuaryrates ofreturn LARGEST EQUITY REITs,
are so substantial that itwould seempossible to
invest in small REITs in January and investin
governmentsecurities forthe restofthe yearin
ordertomake areturn well above whatcouldbe
considerednormal.
The implication ofthese results is that the
REITmarket is inefficient. One might invoke
the standardexplanations forthe stockmarket
January andSizeEffects toexplain REITJanuary
andSizeEffects. However, the validity ofthe 5%o- FMAMJ ASONDJ
agency argumentmay bequestioned. Itis _L _L J L _L J I I L
unclearthatmutual funds are heavily involvedin
J
theREIT market.
SOURCE:ORER
Thisfirst issue ofthe ORERLETTER wasproducedasapilotissue. The editor
andgraphicdesignerofthis issue wasPeterF. Colwell, the ORERProfessorof
RealEstate. In addition, all butone ofthepiecesin thisissue were written by
Peter Colwell. The exception is "BuildingActivity inPeoria" which was written
by WilliamR. Bryan, Chairman oftheDepartmentofFinance, and Matthew
Maher,ResearchAssistant
ORER Letter Page
Housing Market Efficiency Figure 1
AVERAGE MONTHLY RATES OF RETURN 1970-81
Efficiency inthe housingmarketwouldbesug-
gestedby alackofsubstantial seasonaleffects in
therateofreturn forhousing. Ifhigherthan nor-
malratesofreturnwereexpectedin anyparticular
month, sellers wouldbe influenced ... as would
buyers ... to adjustthe timing oftheirtransac-
tion. This speculative activity woulddriveout
the abovenormalreturns associatedwith thetim-
ingofhousesales ifthe marketwereefficient.
Therefore, substantial seasonaleffects in the
housingmarketwouldbeindicativeofinefficien-
cyin thatmarket. Also, ifseasonal effects in the
housing market look like those found in the
stockmarket, theconventionalexplanations
wouldbe calledintoquestion. Thatis, itwould
bedifficultto argue thateither thetax selling hy- -1%
pothesisorthe agencyproblemcouldexplain,
say, aJanuaryEffectin thehousing market. If
theseexplanations prove tobe inadequate, andit
is beginning to look as ifthis is the case, the SOURCE:ORER
mysteryoftheseseasonal effectswoulddeepen.
Figure 1 shows the seasonal rates ofreturn in Figure 2
oneurbanarea. The highestrateofreturn is for AVERAGE MONTHLY RATES OF RETURN 1958-81
January. Butin addition to aJanuaryEffect, it
appears as ifthere is apeakintherateofreturn at
thebeginningofeach quarter. The questionthat 10%
arises is whether there is anything like this quar-
terlyeffectin thestock market.
Figure2 shows the seasonal rates ofreturn for
middle-sizefirms on theNewYorkStockEx-
change. The similarities andthedifferences be-
tween dieNewYorkStockExchange andthe
housing marketareclearcutbetweenFigures 1
and2.
Theprincipaldifferenceis thattherates ofre-
turn in theNYSE are systematically higherthan
therates in the housing market. Onereason for
this is that the housing marketrates ofreturn
measureonlyappreciation whereas theNYSE
ratesofreturnmeasure appreciation andincome
(thatis, dividends). Ifone were toimpute in-
come to theowners ofhousing, therates ofre- F M A
turntohousingownershipwouldbeincreased. SOURCE:ORER
Theprincipal similarity between housing mar-
ketandNYSEratesofreturn appears tobe the
quarterlyeffect. Thatis, besides thewell-known The implicationofthe similarities ofthehousing marketseasonalrateofre-
Januaryeffect, thereis apeak approximately at turnpattern withtheNYSE seasonal rateofreturnpattern is that, ifoneexplana-
thebeginningofeachquarter. Theoneexception tion is to handle both patterns, it will have to be a new explanation. As ofthe
is thatthis effectfortheNYSE lags the effectin present, this is agreatmystery in the fieldsoffinance andrealestate.
the housing marketbyone month forthe fourth
quarteronly.
ORER Letter Page 4
Rho
Epsilon Activities
The Spring 1987 scheduleofactivities forRho centMetropolitanreal estatedevelopments in the
Epsilon was very full. Rho Epsilon is a nation- Indianapolis area. continuedfrompage 1
al real estate fraternity with abusy chapter atthe The thirdfieldtripofthe semesterwas a
University ofIllinois. With astudent member- luncheon sponsored by theChicagoChapterof fices is in 304DavidKinley
ship ofapproximately 80, there was substantial theSociety ofIndustrial andOfficeRealtors. Hall. TheDirector's office,
interestin the eleven formal Rho Epsilon activi- The Vice President, Alan Berggren, chaired anouterSecretary'soffice,
ties during the spring semester. theprogramwhich was focusedon SummerIn- andaconferenceroomalong
Thetopic ofthe firstmeeting ofthe semester ternships. Six firms with positions available withfourfacultyoffices will
was brokerage. Craig Bayless, Vice President wererepresentedand 12students attendedwho bepartofthis suite.
andBranchManageratCushman andWakefield, were looking for internship positions. Steve
spokeon the subjectofcommercial brokerageon Podolsky, President ofthe SIOR Chapter, pre- 6 NEW PAPERS
February 3. sented the U ofI representative, Roger Canna-
On February 10, the topic was syndications day, with acheck for$1,500 for tiie SIOR Sofarthis year, six new
and acquisitions. The speaker was Michael Scholarship at the U ofI. manuscripts havebeen pub-
Herzberg, Senior VicePresidentofJMB Real- On April 21, Corporate Real Estate was the lished as ORER Papers. The
ty- principal topic ofthe Rho Epsilon meeting. firstofthese is a study of
Commercial leasing was the topic ofthe third James T. Schaefer, Corporate Director of REITs (RealEstateInvest-
meeting ofthe semester. A Leasing Agentwith RealEstate forBeatriceFoods, was the speaker. mentTrusts) as contingent
RubloffInc. - Office Properties Group, Andrew Afterthepresentation, anelection was heldfor claims by Park andRushing.
Davidson spoke on leasing issues at the Febru- the Fall 1987 Officers ofRho Epsilon. Mi- Next, apaperby Sunderman,
ary 24 meeting ofRho Epsilon. chael Fine was elected President. Jayne Ro- Cannaday, andColwell ana-
The March 3 meetingfocusedon Institutional manchek was electedVicePresident, and lyzes the marketvalueofas-
Investments. The speaker was Jerry Garren, a Scott Rubin was elected Secretary. Alissa sumption financing. The
VicePresidentin production atMetropolitan Schneider was electedTreasurer. thirdofthis Spring's papers
Life. The lastRhoEpsilon meeting ofthe semester concernsrealestateprice
The meeting ofMarch 24examinedareasof was held on May 6. The topic was Mortgage bubbles andwas writtenby
RealEstateRegulation. The speakers were Banking. The speaker was Jay Strauss, Scott. The fourth paper is
Dennis Bennett and Kevin O'Connell Chairman ofthe BoardofFocusFinancial byThomas andReskin and
from theFederalHome Loan BankofChicago. Group. Thanks were given to the Spring 1987 is aboutoccupational change
A field trip to Chicago was heldon March 27. Officers who did a finejob: Carie Karnezis, andsex integrationinreal
Fifteen students and Roger Cannaday, the fa- Dale Cooney, Teresa Connors, and Rich estate sales. The fifth of
culty advisor, visited three businesses. Howard Frosser the outgoing President, Vice President, thesepapersdealswith the
Walker was the host at Olympia and York. SecretaryandTreasurer,respectively. capitalization oftaxes and
Thediscussioncenteredarounddevelopment. At public service benefits across
Harris Trust, the host, John Rutledge, dis- jurisdictions. The sixth and
cussedreal estate loans andportfolio manage- Rho Epsilon Thriving mostrecentORER Paper is
ment. Lunch wasprovidedby Harris Trust. aboutthe real estate impacts
Lastly, Jared Shiaes, at Shlaes & Company, Rho Epsilon membership at the University ofIl- oftax reform andwas written
discussedreal estate consulting with the RhoEp- linois is near its all-time high. Total new mem- by Follain, Hendershott, and
silon group. bershipreached 62during thepastacademic year. Ling.
On April 7, Commercial Development was the This is very close to the peak of65 new mem- These, andotherORER
topic of the Rho Epsilon meeting. Richard bers during the year 1984-85. Although records Papers canbeobtainedfree
Hanson, President ofStein and Company, was are notcomplete.the 1983-84 academic year ap- ofcharge byrequestingthem
the speakeron this topic. pears to have been the low point forRho Epsilon from the ORER. The ad-
The second field tripofthesemesterwas an membership. dress is on page 8.
overnight trip to Indianapolis on April 10 and The previous high membershipyearwas 1979-
11. The trip was sponsored by Metropolitan Life 80. There were 50 new members that year, up continuedonpage5
with Fred Lieblich and Michael Schack as from45 in each ofthe twoprevious years and 32
the hosts. Twelve students and two faculty advi- in the 1976-77, the inagural yearofthecurrent
sors, Roger Cannaday and Phil Rushing, charter.
attended. The purposeofthe trip was tovisit re-
\»-.
ORER Letter Page
Enrollments Build in Real Estate
Enrollmentin the introductoryrealestatecourse, class sizeofabout33.5 andendedwith size at
Fundamentals ofReal Estate, has grown steadily 43.9, amorethan thirty percent increase.
for all butone ofthe lastsix years. During the Atsome stage, it may becomenecessaryto
1981-82 academic year, enrollmentwas201 stu- move to alecture-discussion section format.
dents in all sections. This year enrollment is 439 ProfessorColwell, ORER ProfessorofReal 2 IBR ARTICLES
in all sections. The only pause in the growth Estate, has said that "ideal class size for the in-
was in the year 1984-85 when there were 350stu- troductorycourse is approximately 25 to 30 stu- The Illinois Business Re-
dents enrolled, twofewerthanduring theprevious dents. A lecture-discussion section formatmight view publishedtwo articles
year. achieveenrollments of25 students perdiscussion whichweresponsoredby the
The numberofsections ofthecourse has also section with a lecture ofabout 200 students. ORER. In the February
grown steadily over the past six years. From a The impactfromthestudentperspectiveis 1987 issue ofthe IBR,
low ofsix sections offeredin 1981-82, there were mixed. Smallerdiscussion sections make for Schnare wrote aboutthe
ten sections offeredduring 1986-87. Theonly better interaction, butthe largelectures allow for measurable decUne in resi-
setback in this history ofgrowth was in 1983-84 less interaction." dential segregation in
with six, one fewer than the previous year. This Anotherperspectivehas beenexpressedbyPro- Chicago but thought it a
historyofgrowth in the numberofsectionsre- fessorBryan, Chairman oftheFinanceDepart- "dubious achievement" given
flects an increasing committmentofresources to ment. He said "We oughttoconsiderthe impact thelargerdeclineselsewhere
therealestate areaby theCollegeofCommerce ofincreasedservice attheintroductory levelon in the nation. The April
and Business Administration. theremainderofthecourseofferings in thereal issueofthe IBR contains an
Unfortunately, theincreasedresources havenot estate area. Going to alecture-discussion section articleby Cannaday, Stunard,
keptpace withdemand. Class size soaredduring formatin thefirstreal estatecourse may free up andSundermanon
the firstcoupleofyears ofthis period. Since teaching resources so thatwecan improve the assessmentuniformity of
then ithas plateauedout atahigher level. Figure upperdivisioncourseofferings. We have hadto Chicago condominiums.
1 shows thatthe past seven years began with do this inotherareas within the FinanceDepart-
ment. Itcould happen to real estate." FOLLAIN PRESENTS
Inrecentmonths theDirector
Spring and Fall Course of the ORER, Jim Follain,
Figure 1
Offerings has made presentations to
Class Size in "Fundamentals" several groups: the National
Beyondthe five sections oftheintroductoryreal Tax Association, the
estatecourse, theDepartmentofFinance offered AmericanRealEstate and
Urban Economics
three otherreal estate courses forthe Spring 1987
semester. These threecourses wereReal Estate Association, and agroupof
Investment, Real EstateFinancial Markets, and the Home andHousing
Real Estate andUrbanLandEconomics, asurvey Economists associatedwith
class at the graduate level. the U ofI Extension
There arefoursections oftheintroductory Service.
coursescheduledfortheFall 1987 semester. In He has also met with the
addition, the LegalEnvironmentofRealEstate, staffoftheNational
Urban Real Estate Valuation.Urban Economics, Association ofRealtors® to
andRealEstateandUrban LandEconomics are discuss ways in which
ORER andNAR mightwork
alsoscheduled.
This basic pattern is repeatedeach yearwith more closely together.
fewchanges. The introductory orsurveycourses
COLWELL SPEAKS
areofferedeachsemester. Otherwise,courses are
notrepeatedduring the academic year.
*
l0CosO0ol oK0o)0 AIo*CcPoOademic\Oi0rDO0>Year ro\C^oDO Nounfedyweeracgrorsu.ardsHedosewvheeavlveoeprm,neotnthtbeecroeeunirsasesddoaemndedfaionrgtreaarnedsurtmeaiblnearn CsInoorlJwoaefnlulRa,eraytlhe1Es9Ot8a7Rt,eE,PReptrePerrsoefnetse-d
estate financecourse.
continuedonpage6
#<-
ORER Letter Page
CARL WEBBER PROFILE & INTERVIEW
-
MichaelHoeflich, UofIProfessorofLaw, calls transaction, such as working with peopleon the
CarlWebber "asuperbrealestate lawyer." Dean house they wantto live in, is challenging and continuedfrompage5
PeterHayofthe UofI College ofLaw calls him enjoyable. Real estate is aunique amalgamof
"afirstratelawyer . . . technicallysuperb "and things you can touch, along with the human as- aresearchproposalonfunc-
"very insightful andsensitive topolicy issues." pectofthe community. tionalobsolescence to the
CarlWebberisthemostrecentaddition to the HomerHoytAdvancedStudy
realestatefacultyatthe UniversityofIllinois. ORER: Whatsortofproblems doyou face in Institute. He will be
He will teach theLegalEnvironmentofReal yourrealestatepractice? completing this study and
Estate classin theFall 1987semester. presenting it to the Institute
Carlisan Urbana-basedattorneyspecializingin CW:One problem is the unknown. It also nextJanuary. Professor
realestatelaw. Hehasa1966bachelorsdegree makes things interesting. Acurrentprojectin- Colwell will become aFel-
in businessfromNorthwestern University. After volves aclientpurchasing property to start a low ofthe Institute.
afouryearstint in theNavy, he went to law small business. Itinvolves the neighboring CANNADAY &
schoolatthe UofIgraduating in 1973. landownerforan easement, theneighboring R41c
He hasbeenveryactiveinprofessionalservice. tenantforalicense, anotherneighborforasite
He hasbeen a memberofthe UofICollege of line, thelenderforfinancing, regional planners RogerCannaday, Associate
LawBoardofVisitorssince 1980andamember foraformalreport, and thecity foraconditional ProfessorinFinanceanda
oftheIllinoisBarAssociationRealEstate Sec- use permit. It startedout to be simple (many specialistin the areaofap-
tion Councilsince 1983. He hasservedbothas do). The seller, imknown to us, merely leased praisal, is currendy both
SecretaryandasPresidentoftheChampaign the neighboring property. The titlereport writing apaperonR41c and
CountyBarAssociation. Lastyearhe became an showed an easementbenefitting theneighboring organizing a session on the
AmericanBarFoundationFellow, having been property, which the sellerdidn'trecall. The sell- topic forthisDecember's
anIllinoisBarFoundationFellowsince 1984, erhadtheobligation toobtain areleaseofthe AmericanRealEstateand
andthisyearhebeganasalecturerforthe Illi- easement, butcouldn't, since the ownerwas in- UrbanEconomicsAssocia-
noisBarAssociation in Continuing Education. accessible "on the Continentfor the summer." tion Meetings in Chicago.
Professor WilliamBryan, ChairmanoftheDe- Through aguarantee, alicense, andan adjust- Thepaperwilldemonstrate
partmentofFinance at the UofIsays, ". . the mentin theprice, we sorteditoutandclosedon how toproviderequiredmar-
FinanceDepartmentisfortunateindeedtohave time. ketsupportforadjustments
suchan accomplishedlawyerteachingourreal Another problem is inertia. Institutions often in the sales comparison ap-
estate lawclass." Carlwillhave theacademic don'tlike tochange theirposition. A transac- proach. The session will in-
rankofAdjunctProfessorofFinanceforhisFall tion might appear to be beneficial to all, butit volveregulators, academics,
1987teaching assignment. still may be difficult to get things moving. To andpracticing appraisers.
ORER: What is it that broughtyou to the real rmeocvoer,dswiolmlesohnoewhwashotodmida.keAaddeecciissiioonn,maaknedrtihse ADVISORS ADVISE
estatearea? more often lookedupon as being toblamewhen
aproblemcomes from arecentdecision, than Threemajordecisionscame
ClaWn:d aIn'vdebauliwladiynsgse,njbouyteidtrreefallecetsstataec.omItmsunnoittjyu'sst winhgeintsittoslli.mpIltyisisriasrkeysutlotdoefcitdhee;sstaotmuestqiumoestatkh-e oouftthoefOthReEMRayAd1v4ismoereyting
health andpotential. When I was a young boy, decision isn'tmade. Committee. A grant was
my fatherwouldoften say "Let's goforadrive," made toLouis Scott to study
andwewoulddrive aroundUrbana-Champaign. ORER: Haveyoueverworkedwithinsurance thechanging gapbetween
He wouldcontinuallycommenton whatwasde- companies? mortgage interestrates and
veloping andon what might be coming. I otherlong-terminterest
couldn'tbelievehow much time he would spend CW: We workedfortwo andahalfyears putting rates. Itwas decidedthatthe
on such "boring" things as storm wateror the togetherarecenttransaction. Oneparty had to AdvisoryCommittee should
distance to the sanitary treatmentplant. I would receive approval oftheirinsurancecompany holdaonedayretreattode-
be thinkingonly ofwhatadevelopmentwould lender. They hadbeen unwilling tomake the velop a strategic plan for
look like. But in real estate, there is so much contactuntileverything else was finished. ORER. The Committee
thatdoesn'tmeet the eye. To get thejob done, Time keptcreeping on. Atlastwe finalized will furtherconsiderthepos-
you hadbettermakesure itdrains! everything andwere allowedtorequesttheirin- sibility ofthe ORER organ-
It is achallenge in real estate to work with so surancecompany lender's approval aweekorten izing aconferenceonhous-
manypeople: lenders, landowners,planners, de- days priortothe scheduledclosing. Wecalled ing financepolicy.
velopers, tenants, andon andon. Even abasic the insurancecompany andthey saidthatthey
