Real estate in pre-recovery stage, Korpacz says.

The commercial real estate investment market is hovering on the edge of recovery, and competition has shot up, especially for retail and apartment properties, according to a recent survey of investors. Backed by a bottom-market perception, there is an almost palpable feeling, "We've hit bottom and If I don't get out and buy some real estate quick, I'm going to blow it."

"There is more action in the market than we've seen for a long time," reports Peter F. Korpacz, MAI, in the Korpacz Real Estate Investor Survey. "Under normal circumstances, we could say the recovery has begun." Yet tempering the optimism is concern that the foundation for the activity is more than a little shaky. "I'm not so sure the fundamentals make any sense yet," he says. "The demand factors that are necessary to cut into the oversupply of real estate simply are not present."

The national economic recovery is still weak, and retail sales and capital expenditures are increasing at very modest rates. Most significantly, job growth, the primary indicator of sustained demand for real estate, continues to substantially trail general economic growth. No immediate acceleration is anticipated, due to factors such as improved productivity in many industries and overall caution on the part of employers who are waiting to understand the full effects of government actions, including NAFTA and health care reform.

"The investors we survey agree that real estate markets across the board - with the exception of Southern California - have hit bottom, but they expect the bottom market to last as long as 18 months," Korpacz says. "True recovery is still elusive, and the best that can be said is that real estate is in a pre-recovery stage."

While it is clear that REITs have had an impact on the apartment and strip shopping center markets, opinion is divided on their long-term effect on real estate in general. Some Korpacz Survey participants hold that REIT money is really "flight" money from investors who are buying REIT shares for a better yield than they can get currently from CDs and other bank products. "They are buying yield, not necessarily real estate," Korpacz says, "and in some cases the underlying value of the real estate does not justify the prices REITs are paying."

REITs are stock investments," Korpacz explains, "and in large part what drives the stock market is expectation of growth and earnings." Unless there is demand for the real estate and the resultant increase in rents, the growth that is necessary to support REIT share prices may be lacking. Some REITS are already experiencing price decreases, and a few have not been able to make their dividend projections.

This quarter the Korpacz Real Estate Investor Survey introduced coverage of the national hotel market. Prepared by Coopers & Lybrand, the hotel report is divided by market segments: full-service, economy/limited-service, and luxury hotels.

Findings of the hotel survey include: *Competition for good-quality full-service and economy/limited-service hotels is on the rise. The spread between asking price and bids is narrowing, and in some situations bids, driven up by competition for the asset, actually exceed the asking price.

*There is less interest in luxury hotels and resorts because of the large cash requirement, perceived higher risk, and escalating operating costs.

*Many hotel investors prefer to buy underperforming hotels that offer the opportunity for increased earnings through improved management and a change in franchise affiliation.