Economist predicts prosperity.

A steady real estate investment environment and vibrant economy continuing through the year 2000 was forecast by Landauer Realty Group, Inc.'s chief economist Hugh F. Kelly at a recent news briefing. Landauer is the research and consultative services unit of Grubb & Ellis Company.

"The destiny of the real estate industry is, in large part, a function of embedded demographic patterns," Kelly said. "The substantial population growth among 55-64 year-olds will create opportunities for retailing, resorts and recreational development, which will in turn require entertainment and recreational venues with commercial facilities to support them. Meanwhile, corporations are awakening to the realities of labor scarcity, which will put a premium on worker-friendly facilities in the coming decade."

The Landauer chief economist also projected that the following conditions will distinguish the U.S. real estate market in the coming year and beyond:

* The supply/demand dynamics of the property markets do not suggest any immediate threat of a sudden, volatile disturbance of conditions in the industry. The key discipline will be to project users' space needs based upon achievable, affordable levels of demand, rather than expecting the growth rate expansion to continue.

* A large number of "dot.com" companies will disappear in the next five years as investors demand profits, not promises. Kelly noted that a worrisome and unknown element in the spectacular growth in Internet companies that could affect real estate is that none of these firms has yet encountered a recessionary business cycle.

* Revitalized downtowns will be a major story between the years 2000 and 2010, driving an intensification of institutional interest in the office sector in major U.S. cities.

According to Kelly, global economic stability, not inflation, is now the key to understanding interest rate policy, as the Federal Reserve Board essentially functions as the central banker to the world.

Landauer's 2000 real estate market forecast provides an analysis of the national economy as background for Kelly's detailed coverage of current conditions in the office, retail, industrial, residential and hotel markets throughout the country. Featured in the annual forecast are Landauer's proprietary Market Quality Ratings for each property type.

Kelly cautioned that construction nationwide is likely to outstrip net absorption in the year 2000, and the upward curve of new starts could compromise investor interest if sustained beyond one year. Offices have proved a remarkable, versatile and adaptable asset class, and should do well in the new technologized environment.

The retail property market is generating mixed results, according to the Landauer chief economist. "Some retailers are contemplating bankruptcy, while the value of publicly-traded REIT stocks has declined 24 percent from their highs, partly due to growth in Internet shopping," said Kelly. "We believe Internet marketing is actually stimulating consumer activity at many malls and not reducing store volumes. The risk to retail property is not e-commerce - it is the proliferation of new physical space that continues unabated."

Among industrials, the Landauer forecast indicates strength in warehousing and light manufacturing. Vigorous consumer spending is keeping the flow of goods exceptionally robust. Internet retailing is also producing a positive effect, as Amazon.com and others shift to physically controlling their goods shipment process.

The most popular investment vehicle appears to be the industrial park, Kelly noted, which is commanding a 9 percent cap rate.

Kelly also predicted ample and continuing investment demand for apartments among pension funds and limited partnerships. The widespread appeal of the multi-family sector is attributable to its excellent supply/demand balance. Garden apartments in growing suburban communities account for most of the activity, outpacing that of luxury urban properties. Double-digit returns are still available from multi-family assets, with little risk of declining values in the next several years.

Hotel investments appear consigned to a year of mixed performance, according to the Landauer economist. Limited-service hotels suffer from intensifying market competition, causing investors to avoid them. Conversely, full-service hotels in the top markets of New York, Boston, Washington, San Francisco, Orlando and Las Vegas are still avidly sought. In general, the demand side of the hospitality market remains good, but supply far exceeds demand in the limited-service sector. Capital with an appetite for higher risk/higher return could look to hotels in 2000 as a market-timing move, Kelly noted.