Investor survey predicts good year ahead.

More real estate investors are eager "to step up to the plate and take a swing" - and they have all the money they need to buy into the game, according to the Korpacz Real Estate Investor Survey released last week.

Investors acknowledge that capital is still driving the real estate investment market, but many believe that real estate risk taking is safer under current market conditions. They are reasonably confident that space markets will catch up with capital input, although not at the pace of past real estate recoveries, the survey concludes.

The strong expansion of the national economy during 1994 provided the necessary foundation for the real estate recovery to take hold. Absorption has turned the comer and is positive in most property markets. Its continued rise is critical if 1995 investments are to meet investor expectations. In most markets, rent levels are poised for a comeback, but increases to date have been modest.

"Investors are in agreement that 1995 will be a positive year for real estate," says Peter F. Korpacz, MAI, editor-in-chief of the survey. "They are generally optimistic, but their optimism is tempered by the harsh lessons of the recent past."

A major concern among investors is the prospect of the Fed increasing interest rates higher during 1995. They feel that more increases could stall the real estate recovery. "Short-term interest rate hikes have not affected yields on real estate yet, partly due to a natural lag and partly to competition for properties," reports Korpacz. "As long as it's the short side of the curve, the impact on real estate will not be overwhelming, but if long-term rates move up too far, substantially affecting long-term mortgages, we're in trouble."

Buy or Sell?

More than half of the survey respondents think that 1995 will be a better time to buy than to sell commercial property. Pension funds as real estate investors are back in full force; 94.1 percent of survey respondents cite them as most likely buyers of real estate in 1995. Other institutional investors and foreign buyers rank a close second. Investors from the Pacific Rim, absent Japanese, were mentioned by 58.8 percent of respondents. Because of their portfolio cycles, pension funds, insurance companies, and REITs are expected to be sellers as well as buyers this year.

Sources of Capital

Both equity and debt capital will be abundant in 1995. The most active buyers, pension funds, are also expected to be the primary capital source. In ranking sources of capital, 76.5 percent of respondents indicated that pension funds will be "very important," and the remaining 23.5 percent said they would be "important." Insurance companies were rated second as a significant source of capital.

The infusion of REIT capital was a tremendous boon to the capital-starved real estate market during the past two years. However, their prominence began to diminish in the second half of last year and is expected to subside further during 1995.

Where to Invest

Atlanta is the mid-1990s boom town, and for the second year in a row Korpacz survey respondents named it tho city that will offer the best real estate investment opportunities. "The common thread among the metropolitan areas cited is that their outstanding attributes translate to jobs," Korpacz says. Rankings of the top cities are listed below; their positions in last year's Korpacz forecast are shown in parentheses.

1. Atlanta (2) 2. Washington, DC (2) 3. Denver (3) 4. Dallas (5) 5. Chicago (4) and San Francisco (10)

Already a major regional distribution center, Atlanta has exceptional job growth, led by an active communications industry. Many investors anticipate that after the 1996 Olympics, the city will see more international investment. The prospect of increased international investment is also a factor in San Francisco's jump to tie with Chicago in the "best cities contest."

Value Indications

Korpacz asked the investors to forecast the direction of various rates that evidence value trends, among them yield rates, rental rates, and vacancy rates. These indicators support investors' general expectation for a solid year for real estate. The consensus is that values will increase or remain stable in all surveyed markets, except the national apartment market. Respondents are unanimous in their expectation that prices/values will increase in the Manhattan and Pacific Northwest office markets. A large majority of respondents foresee increases in the national suburban office market (90 per-cent), the national CBD office market (70 percent), the Washington, DC office market (75 percent), and the national industrial market (88.9 percent).

Rental rates are expected to increase while concessions decrease in all surveyed markets. The exception is the Los Angeles office market.

Space markets are forecast to improve in all surveyed markets, with the notable exception of retail markets. In the national regional mall market, 58.3 percent of respondents believe that the vacancy rate will not change, and 54.6 percent think absorption will remain the same. In the national strip shopping center market, 50 percent believe that the vacancy rate will increase; 57.1 percent think absorption will decrease.

Hotel Market Forecast

Now that the hospitality industry is improving, investors are once again enthusiastic about acquiring hotels, especially full-service hotels. Respondents to a separate survey for the Korpacz publication, conducted by Coopers & Lybrand L.L.P., anticipate another year of strong profit growth and forecast a competitive transaction market.

Hotel survey participants rank the most important issues for the hotel industry in 1995 as follows: (1) absorption of existing rooms, (2) lack of new construction, (3) credit availability, (4) inflation, and (5) operating expense growth. As expected, participants unanimously ranked room absorption as the most positive influence. They are evenly split on new supply, with 50 percent citing new construction activity as beneficial to the industry.