Good news for developers as modest growth is forecast for 2007.

With an increased dearth of attainable assets to acquire that are prudently priced, all real estate professionals are trying to navigate through the year 2007 to determine where value can be found in the acquisition of real estate.

We see an unfolding slowdown of the US economy with the remembrance of the year 2006 being witness to a 1.6% annualized growth rate, for instance, in the third quarter of 2006. Perhaps one will witness the 2007 growth rate to be all of around 2%.

The residential real estate weakness in the market materialized and with this and other forces taking hold, a continued weak housing market could easily dent the overall giddy consumer who has, in years past, stimulated the economy, propping up consumer spending and seemingly indulging an insatiable appetite for imports stimulating the US and global economy.

As we approach the year 2007 with a macro vision, we seem to be in the middle of an economic cycle, albeit a luke warm cycle of an economy. Yields on long term bonds are higher than yields on short term bonds; with the yield on the 3 month T-bill hovering around 5.07% well above the 4.7ish range of the 10 year note.

Usually when the inverted yield curves starts to rear its head, the consensus of opinion is that it is conceivable that the US economy could be heading into a recession though, for the moment, the confluence of data doesn't necessarily point in that direction.

Overall, we expect some contraction in the for-sale residential market that the residential market will flirt with but ultimately not lead to a sharp weakness. Attractive opportunities will always present themselves for those willing to take a close look out all the possibilities.

For developers and investors, cap rates are expected to shrink. Average cap rates, according to Real Capital Analytics, are 2.2% less than overall cap rates were in 2002.

A developer and investor must continually focus on the terminal value of the asset that is being acquired and/ or developed as the interest rate environment and weakness in the for-sale housing market is compressing the yields that one can make it the development business of for-sale housing.

The good news on the cost front of development is that, according to GE Commercial Finance material price index, appreciation of a "typical basic cost of materials for a construction job" has slowed to an expected end year 2006 out of 3.6% after increasing 7.2% in 1st quarter 2006 and 8.9% in the last two quarters aggregated.

After the years 2004 and 2005 playing witness to mid to high teen residential spending, as an overall number for private and public construction spending, it is expected that 2006 will finish with only a low single digit increase in construction spending and that 2007 estimated number will see a further contraction of construction dollars being allocated to this sector in the single digit range when compared to the entire 2006 year.

According to the National Association of Home Builders, housing starts will slide by about 13.2% on an annualized basis when looking at fiscal year second quarter 2006 to the year 2007.

All this plays out on a micro level in NYC. Troutbrook Company, a full service real estate development and investment firm, saw a number of projects we were executing stall in sales in the third quarter of 2006. This point is presented as a consideration only in as much as the same thoughts were mirrored by colleagues. That is not to say that product was not moving, but it clearly was at a slower pace. Only recently, we began to see the health of the New York City real estate market rebound with signed contracts in mid November and thereafter, again on our desk.

It is interesting to note that, as a back drop to this dialogue, we were witness to a myriad of development deals that were in contract that did not close or we were witness to sellers affording the contract vendee more time to close and to push a deal closing into 2007 with the expectation that the contact vendor execute the acquisition at the middle 2006 acquisition number, clearly a higher acquisition number.

Other observations of the slower residential real estate market also created a situation that the soft cost number a developer anticipates when projecting a sensitivity analysis escalating by a solid 25% due to the expected extended duration of the developments sell out.

When we look at 2007 we see a healthy market with opportunity but are also more sanguine about the demands of the market and the need to stay intimately involved with the project to insure that the development is unique and able to command the pricing in the marketplace.

We continue to acquire added value deals either mixed use or residential development sites.

By Mark Freud, Principal,

Troutbrook Company