Now is the time for cautious optimism.

At the risk of jinxing some positive developments in our real estate industry, it's a good time to take stock and evaluate the industry's condition and speculate a little for the future.

Despite rising interest rates (which hopefully have reached their ceiling), inflation seems under control, economic growth continues, and some investors are coming back to real estate. Absorption is getting stronger in most sectors, but less so in the commercial markets. Lenders, though more conservative then in the past, are loosening their coffers. The modest upturn is due in part to the lack of alternate higher yielding investments, and some adjustment in the supply and, therefore, demand side of the market, especially in the residential sector.

REITs, Pensions

Contributing factors also include more tightly structured and sophisticated Real Estate Investment Trusts (REITs), that are attracting investors who have been sitting on the sidelines because of the low yields and the risky, management intensive real estate product traditionally held in a partnership structure. REITs, at least at present, are taking advantage of undervalued real estate -- preferably with low debt, and offering high dividends plus potential substantial appreciation to investors who can rely on professional management to control the assets.

Also helping to fuel the REIT market is the reappearance of pension funds, which due to recent tax law modifications can now participate in REIT transactions.

Vulnerable Areas

We have not by any means pulled out of our region's slump. The past overbuilding and the ill effects of a troubled economy as well as the results of overly ambitious lending practices are still with us.

Locally, properties are under pressure to deliver first-rate space with first-class service - no matter what sector of the market - to remain competitive. Owners have to invest in the capital needs and improvements of the properties even though operating expenses are rising and vacancies remain a problem. Staying power, is vital, since cutting corners will have a negative effect on the building's value and standing in the market.

Future Outlook

Areas of opportunity, either as investor or active broker, consultant or manager, seem most likely to occur in REIT activity, at least for the short term. Returns of both capital appreciation and dividends will probably remain strong for the next year or so. Some predict that the REIT market will settle down - returns will decrease - and experience pressure from alternate investments. This downward correction will occur mainly from inflation and an overabundance of REIT products, causing prices to drop and dividends to slack off as debt builds.

The federal government may also prove to be a source of business. HUD, the federal Department of Housing and Urban Development, is restructuring its internal organization and the way it does business. As an example, HUD is delegating more responsibility for its housing portfolio to the states and private industry. One particular program, the HUD Loan Sales Program, envisions auctioning HUD-held mortgages to state housing finance agencies and the public. The purchasers will then replace HUD as mortgagee and servicer of the loans. The involvement of the private sector in this, and hopefully other programs, may be a boost for our industry.

These opportunities will have a particularly positive impact on asset and property managers. REITs will need to demonstrate strong professional management to investors and regulators. Good credentials and strong track records will be a must.

All in all, the real estate industry will continue to be competitive, respond to increasing demand for bottom line performance, but also prove again to be a growth industry throughout the 1990s.