PricewaterhouseCoopers Sees More Draw-Down, Less Expansion Of Land Inventory By Developers; Increased Pressure on REITs.

NEW YORK--(BUSINESS WIRE)--Aug. 5, 1999--

Mid-Year Land Survey Finds Optimistic Attitude,

Compared With Year-End 1998

In contrast to the "wait and see" attitude that prevailed in the real estate investment community at the end of 1998, the land development market has improved during the first two quarters of this year. This was driven in part by increased interest in multi-use CBD (Central Business District) projects as well as housing in major markets, according to a study released today by PricewaterhouseCoopers, the world's largest professional services firm.

The 1999 Mid-Year National Land Survey, conducted by PricewaterhouseCoopers in collaboration with The Korpacz Organization, which the firm acquired in July, found that, in most areas, developers are paying more attention to working off accumulated land inventories rather than expanding their inventories. At the same time, it noted that there is increased pressure on REITs and public companies to generate immediate returns from their present landholdings, rather than to add additional land inventory.

Calling 1999 a year of "caution and completion rather than one of dramatic new land investments and development projects," the survey found pressure on returns as developers compete for new projects in the strongest markets. As interest rates have begun to move up, some developers have become concerned that effective demand will be reduced.

"The first two quarters of 1999 have been characterized by cautious advance, draw-down of accumulated land inventories, completion of projects started, and flight to quality and to pre-approved, secure commercial projects," the survey noted.

In the residential market, both apartment and single-family home developers have been drawing down current land inventories in 1999, rather than purchasing additional land. During that time, all segments of the housing industry have seen increased construction activity.

During the second half of 1998, the survey noted, REITS, public real estate companies and commercial mortgage-backed securities (CMBS) investors suffered reverses that weakened their roles as driving forces in land investment and development.

"Many Wall Street investors defected and are no longer supplying the capital required to fuel new construction, either directly or indirectly," noted Peter Korpacz, founder of the Korpacz Organization. "These sources of investment capital are not likely to return to the land marketplace in a significant way anytime soon."

According to the survey, the expected unleveraged pre-tax returns (IRRs) for approved land developments ranged from 9 percent to 30 percent with a sample median of 14 percent. The low end of the range and the median are lower than the year-end results, indicating continued competition for desirable site for development. These returns were also associated with build-to- suit and pre-leased projects.

The survey also reported a narrowing of expected gross profit margins and markup over project costs. The median gross profit margin dropped to 14 percent from the year-end survey. The expected markup over project costs remained unchanged. The highest expected returns, according to the survey, continue to be on larger-scale, unapproved/unentitled developments, where unleveraged expected returns can be as high as 60 percent or more. The average and median expected returns on these speculative developments remained unchanged from previous studies.

Land cost as a percentage of total project cost continued to show an upward bias for desirable sites, PricewaterhouseCoopers found. The median land cost as a percentage of total project cost was 16 percent. Office developers expected unleveraged returns from a low of 9 percent for build-to-suite situations to more than 30 percent for speculative developments with an average expected return of 15 percent, the survey said.

The report was included in the Second Quarter 1999 edition of the Korpacz Real Estate Investor Survey, the industry's standard source of up-to-date capitalization discount rates and other cash flow forecasts assumptions of active investors. The survey will continue to be published in the future under Pricewaterhouse Coopers's ownership.

PricewaterhouseCoopers (www.pwcglobal.com) helps its clients develop and execute integrated solutions to build value, manage risk and improve their performance. Drawing on the knowledge and skills of 150,000 people in 150 countries, we provide a full range of business advisory and consulting services to leading global, national and local companies and to public institutions.

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