The government's expanding role in the real estate market and how it affects owners, developers

When I started as an appraiser in the early 1970s, valuation was much simpler. The biggest difference between the early 1970s and the current market is escalated government subsidies to real estate. The extent of government involvement in the early 1970s and before was predominately FHA and VA mortgages for 1-4 family residences and HUD subsidies for low income apartments for financing and rents. Later in the 1970s came SONYMA mortgages in New York state which were primarily due to a usury ceiling that had existed in New York state at that time. For commercial properties, there was Small Business Administration (SBA) loans when occupied by an owner user. In the mid 1970s New York state started an indirect subsidy program via real estate tax abatements under the guise of Business Investment Exemptions (BIE). Other funding such as Urban Development Action Grants (UDAG) were instituted in the late 1970s. Many of these programs still exist today. Of course, in the late 1990s NYS Empire Zones were implemented which extended abatements even farther to costs such as payroll taxes, access to tax credits, etc. The current Empire Zone program will be phased out and the Excelsior program will be phased in. The Excelsior program will focus on high tech and green jobs and will focus on payroll increases versus number of jobs with more accountablility. New Jersey and many of the New England states have similar programs. Over the years low income and senior multiple family of generally lower income projects benefits from the New York State Housing Trust Fund (HTF), the federal program Tax Credit Assistance Program (TCAP) and U.S. Department of Agriculture (USDA). So over the last 35-40 years government involvement in real estate has escalated tremendously through both programs and dollars. The result was more properties being constructed including multi-housing, industrial, office, retail, etc. The problem is that more supply is being created not necessarily due to pure demand but in part to these programs. This creates two tiers of properties, the ones that were built because of these programs and the properties that were developed purely due to market demand. In the early 1970s the ratio of purely driven market projects was probably 95%. Today it is probably only 5%. That means approximately 95% of new projects get some type of government abatement, tax credit or grant. Currently, I can't think of any new construction projects other than some single family suburban subdivisions that do not have government subsidy involvement of some type. Why is this a problem? There are many examples across New York state of some markets having significant vacancy in a property category, but with tax credits, grants, etc., it is still economically viable to construct the project which put the existing projects at peril. As an example there has been some controversy in downtown Buffalo in the hotel market. At least one developer is proposing creating approximately 100 new hotel rooms with the substantial tax credits, grants, etc. in a building rehabilitation. Owners of existing hotels that compete in that market are "up in arms" because of the relatively weak hotel market. Another example of the downside of government subsidies is the massive demolition programs of existing urban housing throughout cities in the region. Much of the large vacant housing stock is being demolished by government in part due to the oversupply that is being created with the help of many government subsidies and grants. As an observer of the real estate market over the last 37 years, I have experienced and measured the continuous movement from a relatively pure real estate market to a type of creeping socialism which damages the fundamentals of the marketplace. The problem with this two tier market is that it creates hardship for existing property owners in regards to competition but also adds to local, state and federal government deficits. The solution is to reduce taxes and keep more money in hands of the private sector which is more efficient than government. John Rynne, MAI, SRA, is the president and owner of Rynne, Murphy & Associates, Inc., Rochester, N.Y.