Last year's improvements spark investors' enthusiasm.

Building on the solid gains in real estate performance this year, 1996 is expected to be a good one for investment real estate, and furthermore, the industry can look forward to an extended period of prosperity. This is the majority opinion of the institutional real estate investor-respondents in the recent Korpacz Real Estate Investor Survey. "This was a 'fat year,' as the word 'prosperous' finally re-entered the real estate vocabulary," says Peter F. Korpacz, MAI, publisher of the survey.

Some analysts believe that in our lifetime we will never again see a nationwide real estate depression, reports the survey. Rather than one national real estate cycle - or business cycle, for that matter - a future of rolling cycles, rolling recessions, is more likely. The experience of the past 10 years, when the real estate recession hit Texas and the Oil Patch, then New York, then New England, then the Midwest, and finally the West Coast, is the anticipated future pattern.

Real estate investors are tending to employ good, solid portfolio theory, which should create a flexibility between product type as well as location. "It's a healthy sign that investors recognize when a certain market is really hot and decide to pay a return to the people whose money they're investing and go on to invest in another market that is on the way up," says Korpacz, quoting a confident survey participant. "This is the best real estate market in 10 years, and we're doing things intelligently."

Participants in the Korpacz Survey expect the national economy to remain steady, interest rates to move downward, and inflation to stay low. In real estate, they look for more absorption, improved rents, and higher values. All in all, the consensus is that 1996 will be even better than 1995.

Industrial and Office Properties Top Target Lists

Industrial warehouse/distribution facilities are the clear favorite acquisition target among institutional investors, as they have been since mid-year. These properties are considered both stable and relatively liquid; therefore, demand continues to exceed available supply.

Competition for suburban office property is intense, and consequently, prices are rising. Although interest in CBD office buildings is rising, it is guarded. Among the concerns of would-be investors is the state of flux of many of the businesses that are traditional downtown tenants. Bank mergers present an enormous problem, since two of the biggest users in any CBD are banks and law firms. Any merger typically diminishes space demand, since one effect usually is staff cutbacks. In addition, the banks' law firms are impacted significantly. "Each bank has its law firm; in a merger there is a winning law firm and a losing firm," says Korpacz.

Some regional mall tenants are going into bankruptcy, rents are flat, and market share continues to be eroded by big-box retailers and other competitors. In addition, as malls nationwide are aging, more owners are faced with expiring operating agreements with the department store anchors that draw consumers to the centers. "No wonder regional malls have lost their allure as prime investments," comments Korpacz.

The impending onslaught of department store operating agreement expirations is drawing attention to a problem that has been building over the past several years, according to the Korpacz report. Since the majority of mall development occurred during the 1970s and early 1980s, the term of many original covenants is ending. "Uncertainty about the permanence of the anchors can have a major impact on a mall's marketability," Korpacz explains. "The prospective buyer who finds that the anchors' sales volumes are good, the stores are profitable, and they are not candidates for merger or buy-out, will likely take the bet that they will remain in the mall," he says. "If the reverse is true, new agreements must be negotiated before an owner can sell the property, an often costly proposition."

(Peter F. Korpacz & Associates, Inc., publisher of the Korpacz Real Estate Investor Survey, is based in Frederick, MD. The firm offers comprehensive real estate appraisal services as well as analytical studies, litigation counseling, arbitration and mediation, and transaction counseling on institutional-grade real estate. Through its research and publishing division, the firm conducts research-based studies and develops publications for a diverse client base.)