Landauer predicts turbulenct but successful transition in '99.

After a first quarter in which cash buyers will dominate negotiations, the property markets will respond favorably to obviously solid fundamentals. Commercial property prices should resume their upward path before '99 is out, especially large, multi-tenant properties such as CBD office buildings and larger shopping centers. Real estate equilibrium should remain intact as the year 2000 approaches, according to the just released 1999 Landauer Real Estate Market Forecast.

The basis for Landauer's prediction of healthy balance in commercial property markets is the strength of the U.S. economy, the return of public market capital to complement traditional private sources of real estate equity and debt, and greater sophistication in accessing and interpreting relevant property information.

Landauer expects the following to characterize the U.S. real estate market in 1999:

* Tighter underwriting, higher floors for commercial mortgage rates and higher risk premiums will keep cap rates up in early 1999.

* Knowledgeable investors will buy "cash-flow spikes" in properties with a high number of lease roll-overs, despite perceptions of flatness in market rent growth.

* The most serious threats lie in events originating in the world economy rather than the real estate industry.

* Upward adjustments in the markets for Wall Street's real estate products should occur as the year progresses.

* Class B or weaker properties could experience a downward correction in prices as tenants migrate to the new generation of buildings now under construction.

* Although the world economic slowdown is having a negative effect on all industrial sectors, the weakness looks mild.

* Apartments should maintain their winning streak through 1999.

* The range of conditions and outlooks for hotel markets is spread wide. A half dozen markets have excellent prospects, but three-quarters of the hospitality sector faces serious difficulty.

These and other national and regional trends are discussed in the 1999 Real Estate Market Forecast published annually by Landauer Associates, Inc., a leading international real estate counseling firm. Its 17th annual forecast analyzes conditions in the U.S. economy and the five major categories of real estate.

"While everyone has been watching the highly visible difficulties in publicly-traded real estate, the privately-held commercial property sector has been bulking up," said Hugh F. Kelly, Landauer's Chief Economist. "Pension funds, the life companies, and investment partnerships are representative of 92 percent of U.S. real estate debt and equity investment. They will be flexing their muscles this year."

The 1999 Landauer Real Estate Market Forecast has this to say about the major segments of the market:

Risk Aversion Will Stem Speculative Office Development

Office markets enter 1999 in sound shape and should be rewarding the confidence that investors have shown in their acquisitions of the past several years. Nationally, offices have returned to single-digit vacancy and have captured more than 33 percent of total real estate investment since 1995. Prices per square foot now average $140 to $150, mean cap rates are under 10 percent, and for assets above $20 million, is an aggressive 8.2 percent. Of the 60 office markets reviewed in Landauer's Market Quality Ratings, 44 attained minimum investment grade of MQR4 or better. (Markets with MQR4 or higher are considered favorable in terms of their fundamentals.) San Francisco, Orlando, Phoenix, Seattle and Washington, D.C. were the top-rated office markets for 1999.

Going forward, the only risk Landauer sees in the office sector is a secular slowdown in demand due to labor market saturation and mergers in the financial industry.

Investors Renew Enthusiasm for Retail Properties

Buoyed by signs of fundamental improvement and seeking to capitalize on the potential for an industry turnaround, investor interest in shopping centers of all sizes surged throughout 1998 and has substantial momentum going into 1999. Pricing parameters have improved with investor returns. Cap rates dropped below 10 percent by the second quarter of 1998, and large, dominant malls have been priced aggressively. Centers with sales in excess of $280 per square foot typically transacted at cap rates between 7 and 8.7 percent. Investors are critically differentiating quality, though, with inferior centers trading at cap rates up to 150 basis points higher. Neither the deterioration of consumer confidence in the wake of falling stock prices nor the perceived threat of Internet shopping should compromise retail's optimistic outlook. Landauer's analysis of supply/demand conditions indicates that the majority of retail markets in the U.S. should be seeing their sales per square foot of store space on the rise in the 1999-2003 period. Chicago, IL and Portland, OR are the top-rated trade areas; most of the Midwest looks healthy; and Florida looks especially strong for 1999.

Moderate Cyclical Easing in Industrial Market

Landauer's Power Ratings analysis indicates that the risk of a slowdown in the economy is having a negative effect on all segments of the industrial market - research and development, light assembly and warehouse/distribution. A rise in vacancy rates, a softening of demand growth and the return of spec construction are attributable. A maturation of the price recovery. and a lower employment forecast are also impacting the Power Ratings scores. San Jose tops the R & D list and Phoenix ranks first in light assembly'. Despite the risk of a economic slowdown having a negative effect on all industrial sectors, the weakness looks mild, and there is no reason to expect: an evaporation of the gains earned in the industry since 1985.

Residential Market Continues Its Winning Streak

More than any other sector, the residential market is driven by demographics, which should portend well for the multi-family industry in the years ahead. Nationally, the vacancy rate was 8.2 percent in 1998 versus 7.9 percent in 1997. The West was lowest at 6.6 percent; the Northeast stood at 7 percent; the Midwest weakened from 7.9 to 8.5 percent; and the South trailed at 9.9 percent. Initial cap rates for multi-family purchases averaged 9.2 percent. Pension funds view apartments as staples in their portfolios, while apartment REIT flows are slowing considerably. Of the 62 markets analyzed for Landauer's Apartment Consolidated Indicators Scale, San Jose, Austin, Anaheim, Honolulu and Oakland were leading. The Northeast has some exceptionally tight markets, including Boston, Middlesex, NJ, Baltimore and Washington, DC. There is still strength in the most ebullient multifamily markets such as Atlanta, Dallas and Phoenix.

Operating Efficiencies Should Be Strategy for Hospitality Industry

Supply/demand fundamentals in the hotel market are weakening, as construction volumes run ahead of visitation gains. Also, corporate belt-tightening could bite into hotel profits quickly and the world economic crisis could cast a pall over international travel. However, operating efficiencies and increased domestic travel should create a comfort zone for the industry. Thirty-four of the 61 markets analyzed for Landauer's Equilibrium Index have as many rooms as they will require for the balance of the next five years. With hoteliers continuing to add product, Landauer is projecting a real decline in market quality.

New York and San Francisco are still standouts, and Las Vegas and Orlando are running a step behind the leaders. Some hotel companies may see a nice bounce from the bottom after their deep discounting in 1998. Landauer recommends keeping a watchful eye on the basics. The assets have to perform if owners expect to realize value into the future.

An executive summary of the Forecast is featured on Landauer's web site, www.landauer.com, and the full version appears on Landauer's www.r-e-search.com, an advanced interactive research tool on the Internet.

Landauer Associates is a leading international real estate counseling firm that provides a range of specialized services for investment grade real estate including regional shopping centers, office buildings, mixed-use developments, hotels and leisure properties, as well as a full complement of market research and surveys. The firm's specific services include valuations, corporate and transaction counseling, research, financial and acquisition analyses, dispositions and workouts, litigation support and asset management.