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Landauer forecasts good years ahead for real estate.

The U.S. economy is now the ally of the real estate industry, not its enemy. This thesis, which has influenced the Landauer Forecast for the past two years, has now achieved widespread accetance among property investors, states Landauer Associates, the international real estate counseling firm, which has just published its 1995 Real Estate Market Forecast.

"With decent business discipline, at least seven good years should lie ahead for real estate," says Hugh F. Kelly, Landauer's Director of Economic Research & Strategic Studies and principal author of the Forecast. "As America's economy began to surge in the Fall of 1993, real estate quickly caught the wave. With construction gear mothballed and rental rates low, economic factors translated into improved demand for commercial property. Our research shows that real corporate profits are at their highest level in 15 years; real wages have risen for the first time since 1986; and job gains have spread to 48 of the 50 states with only California and Hawaii still in decline. The intermountain states are the biggest gainers. We can expect economic cycles to be longer and flatter," he predicted.

What to watch for in 1995? Commercial property is poised to regain some of its value as Wall Street remains flat or drops. As an asset class, one of real estate's characteristics is its "negative covariance" with stocks and bonds. However, key questions concern selectivity issues. Will prices change? What's the likely magnitude of the shift? Which properties will fare best? And, what's the likely geographic distribution?

Real estate securitization will sort itself out in 1995 with national and mixed-property REITs beginning to compete for investor dollars. Institutions will continue to clear their books of REO assets, the Forecast predicts.

Traditional lending activity will strengthen later in the decade, according to Landauer. Foreign investment should move forward once again. The most important message for investors is to think long term.

The Forecast has this to say about major segments of the market:

* Office buildings will be "hot" in 1995 and 1996. Demand has driven declining vacancy rates in CBDs and suburban nodes alike since 1993, but the vigorous pace of absorption is unsustainably high. Landauer's Momentum Index ranks Salt Lake City as the leading market for offices, followed by Columbus and Portland, OR.

New York, Los Angeles, Chicago, Houston and Dallas, while improving, still fall below the national median. If net absorption continues to outrun construction, as is likely, there is a high probability of success for those acquiring quality assets in 1995. Competitive decisions on investment parameters like yield requirements, rental growth assumptions, and capital appreciation potential are required once again, after a period in which buyers could essentially write their own ticket.

The outlook for the retail market is mixed. Increasing sales should push retail rents up, especially since construction is below historic levels, according to the Forecast. REITs have a huge impact on the industry, accounting for over a third of major strip center deals. Be wary of the potential for oversaturation in this segment of the retail property market, Landauer warns. Demand is strong for top tier regionals, which have weathered the department store consolidations well. But, those with poor locations and non-quality anchors could fall prey to big discounters soon. Power centers are entering a shakeout period while the most popular new format is the "supercenter," combining a full service grocery with a big box discounter. According to Landauer's Retail Matrix, Austin, Dallas, San Antonio and Ft. Worth are among the top ten retail markets. Honolulu is in second place.

Over the next year, the most important variable to watch is new construction. REITs could be among the largest stimulants to new development, but the eagerness of pension funds and other institutional investors to include retail properties in their portfolios will also be a part of the equation. A development trend Landauer views favorably is the growing interest in urban retail. With ample barriers to over-building, renewed interest in development of downtown and ethnic neighborhood sites seems to offer promising potential.

The best possible news for the U.S. industrial market is manufacturing's strong revival of the past two years. The attraction for industrial properties is a combination of a strengthening demand outlook, current low prices, and construction levels still introducing only a modest amount of new competition. New development is mostly taking the form of build-to-suit projects. Southeastern U.S. markets, such as Charlotte and some of the Florida cities, should lead as the new construction cycle commences. Salt Lake City and Minneapolis also rank high on Landauer's list of top warehouse markets. Minneapolis has been especially attractive for REITs looking to acquire industrial properties in the $3 million to $7 million price range. Owner/users are frequent purchasers, along with power center retailers, pension funds and REITs. NAFTA is bolstering a demand in the Texas economy, as deal-makers scramble for new opportunities. In Landauer's warehouse Power Ratings, Seattle and Portland, OR rank 2nd and 4th, while Greensboro tops the light industrial chart, followed by Nashville. R&D markets neared a historic high in average Power Ratings, with Washington, D.C. first, and Seattle, Boston, Minneapolis, San Francisco and San Diego, all university centers, in the top ten.

Of the five major property types, the multi-family market represents the strongest income-to-price ratio; however, mixed signals continue to emerge. Investor interest in apartments is still high and competition for acquisitions strong, but selecting the right apartment market has become a complex matter. A surfeit of capital and too few existing projects for sale has initiated another building cycle. Landauer cautions against expectations of demand gains in the years ahead. Wall Street has made a best seller of apartment REITs, but the question remains whether capital improvement funds will remain adequate if dividends sag. Landauer's Apartment Consolidated Indicators Scale ranks Las Vegas as leading the housing market, followed by Honolulu. Contrarians who bought into apartment investments two to four years ago have profited and can expect a stable period of healthy demand-supply balance and realize capitals gains through sale and refinancing. Landauer analysis suggests, however, that new yield-sensitive money should go elsewhere.

The rush of investment capital into the hotel market comes as a stunning change. Occupancies rose; room rates stabilized, then advanced, and overall performance moved toward late 1970s' levels. Operators such as Marriott figured prominently among the buyers, along with overseas investors, Wall Street and REITs.

Soaring corporate profits should bolster demand for full-service hotels. Occupancies rose to 67.5 percent for the cities in Landauer's Hotel Market Equilibrium Index. New York has emerged as a prime beneficiary, with occupancies surging to 74 percent. Washington, too, has experienced a strong hotel demand, now above 70 percent in annualized occupancy by Landauer's estimate. On balance, Landauer finds real reasons for encouragement in the hospitality markets.

Recovery is a process, not an event, the Forecast points out. While trends are pointing upward, most markets are still not in balance, nor will they be truly robust for several years. As recovery is underway, the industry should remember its recent history. The path to health is along the way of equity and attention to fundamentals rather than leverage. As optimism becomes more pervasive, stick to long-term strategies and take gains as they become available, rather than grabbing for the last marginal dollar, Landauer recommends.
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Title Annotation:Landauer Associates' 1995 Real Estate Market Forecast
Publication:Real Estate Weekly
Date:Dec 21, 1994
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