Building a Hollow Skyline

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The hotel industry, as well, has gone on a building binge that many innkeepers now regret. In Houston, the number of hotel rooms increased 46% between 1980 and 1985, to 33,530. Result: the city's hotels are only half full much of the time. Nationally, the room-occupancy rate has slumped from 71% in 1979 to about 65% currently. "There has been a tremendous number of hotels built in the last five years," says Linda Kalmar, president of the Denver Metropolitan Hotel Association. "It's intense. We're all very competitive, like the airlines."

The rivalry has pushed many hotels into the red. Houston's Warwick Post Oak, a 455-room luxury hotel built in 1982 for an estimated $70 million, foundered in March after three money-losing years. Metropolitan Life Insurance, a lender and investor, took possession of the hotel in a last-ditch attempt to save it.

The construction juggernaut is fueled by cash that flows abundantly from institutional investors, including pension funds, insurance companies, banks, and savings and loan associations. "Right now the money is very easy and very loose," says J.H. Snyder, a major Los Angeles developer. Since these investors traditionally have reaped large returns from real estate, many of them continue to pour money into it with the conviction that the market eventually has to improve. Says Arthur Mirante, president of Cushman & Wakefield, a large New York City broker: "The institutions have the staying power and a long-term mentality that borders on recklessness." In addition, many investors have been seduced by provisions in the federal tax code that can turn buildings into income shelters.

The go-go atmosphere is causing some nervousness in the financial industry. While giant insurance companies may be able to weather a slump or a mistake, savings and loan associations are generally not as strong. Following partial deregulation of their industry in 1982, many thrift institutions rushed into commercial real estate ventures before they were savvy enough to know the good from the bad. Says Kenneth Rosen, chairman of the University of California, Berkeley Center for Real Estate and Urban Economics: "Savings and loans should not be in this market unless they have high-level expertise. It's a very tricky market." So far this year, the Federal Government has bailed out three big California S and Ls that succumbed in large part to sour real estate loans. Beverly Hills Federal Savings (assets: $3 billion) collapsed in April, Southern California Savings of Beverly Hills ($1.5 billion) in June, and Bell Savings of San Mateo ($1.7 billion) in July.

Despite the glut, many developers keep on building as if they were bent on bankruptcy. Some of them plunge ahead because they believe their buildings are better than the rest. "It just seems to be a mania. Each developer thinks he's got a super-outstanding product," says John Amory, associate vice president of Coldwell Banker, a national brokerage firm. The builders of suburban Atlanta's Crown Pointe, which will contain 600,000 sq. ft. of office space in two buildings, believe that the project's swank restaurant, hotel and plaza will help lure tenants. "It gives us an aura," says Project Manager Kevin Moats. "Quality always has a way of leasing first, even in a soft market."