Real estate markets to become much more global business.

John Bralower, president of Sonnenblick-Goldman Company, one of the industry's leading independent real estate investment banking firms, said recently that he expects the real estate market to remain strong in the year 2000.

Speaking at a press conference in December, Bralower discussed the trends that are expected to affect the hospitality, office, retail and multi-family sectors in 2000.

"We had uncertainty in the markets when we went into 1999 and we saw a quick rebound," he said. "Companies are starting to take advantage of opportunities more quickly because they see greater stability. Equity and debt continue to be solid investments for real estate in primary markets."

Among other trends in commercial real estate, he noted:

* There is a widening rift between primary and secondary markets, with secondary markets continuing to be adversely affected by the lack of high growth industries and the move towards e-commerce and a 24-hour, 7-day-a-week global economy;

* Major urban areas will remain strong, with urban residential vibrancy continuing to grow;

* There will be strong investment demand and limited availability of real estate assets, though REITs and opportunity funds will probably begin selling more properties;

* E-commerce will have a growing impact on the retail sector, with people buying bulk commodities on the Internet.

Regional Outlook

Over-building in major markets will be less of an issue, Bralower said, than it has been in the past, because stricter government controls and construction lender conservatism will help to manage growth. However, there is potential that over-building could occur relatively quickly in Southern tier markets if job growth slows substantially.

In major Northeast cities such as New York, Boston and Washington, D.C. Bra-lower noted that the underlying real estate fundamentals will remain strong. On the West Coast, he continued; the San Francisco market is the strongest.

International Opportunities

As we enter the new millennium, Bralower noted, "We will see commercial real estate become a more globalized industry." Some of the investment trends and opportunities that will surface this year, he predicted, are:

* Asia will increasingly be a target for investment for Americans, primarily through funds or large single assets;

* Increased lack of liquidity in the domestic Latin American markets will result in better investment opportunities for U.S. and European real estate investors;

* European investors will continue to target high-end U.S. properties and U.S. investors, particularly the hotel companies, will become more active throughout Europe. Eastern Europe, however, will not have the foreign appeal many have predicted.

The Capital Markets: 1999 Recap and Year 2000 Forecast

Steve Kohn, managing director of Sonnenblick-Goldman Company's Capital Markets Group, noted that in the commercial mortgage market, "major change from the beginning of 1999 to the end of the year has been the 38 percent increase in the Treasury rates, rising from about 4.5 percent to as high as 6.2 percent for the 10-year note. With spreads not too dissimilar from early in the year, mortgage rates effectively increased from approximately 6.8 percent to 8.5 percent.

Kohn predicted that "In 2000, spreads should tighten by about 30 basis points and Treasuries could fluctuate from 5.75 percent to 6.5 percent during the year." Although debt will remain readily available for income-producing real estate, loan-to-value (LTV) and debt service coverage ratios will remain conservative in the year 2000. Mezzanine debt pricing, although competitive, is applied at lower debt levels (approximately 70 percent LTV) and only reaching 85 percent LTV. Combined with the higher treasury rates, the total lost debt is significantly higher now (25 percent) than a year ago.

Commenting on the investment outlook for 2000, Kohn said that the higher cost of debt to leveraged buyers, combined with the continued absence of most REITs, will result in fairly flat investment values. The most active buyers today, and throughout 2000, are the investment funds with management partners and pension fund advisors. For certain assets (higher quality and/or net leased properties), German investors will be very aggressive.

Going forward, pension funds are expected to continue investing through advisors, as they remain under-allocated in this asset class. The investment funds are finding it increasingly difficult to meet IRR (Internal Rate of Return) hurdles (e.g. in excess of 20 percent) without taking greater risks (more leverage, more development, more offshore investment). Their appetite for the average investment opportunity is waning, especially given the uncertainly of an exit strategy. REITs were the great exit strategy for average quality assets, but are not expected to be in the foreseeable future, Kohn added.

Office Occupancy to Remain Strong

Kohn forecasts that most office major markets around the country should remain strong in 2000, "although there is some credit risk with Internet companies leasing space in markets such as Boston, San Francisco and New York." Should the stock market cease subsidizing many of their businesses,not only will new demand slacken but "we could see a substantial amount of space returned to the markets." With limited new supply and strong job growth, primarily in markets fueled by the telecommunications, technology, media and Internet explosion, many of the country's office markets should stabilize at single digit vacancy rates for Class A space and in the low to mid-teens for B and C space.

Although rents now justify the cost of new construction in most CBD (Central Business District) and suburban markets, meaningful financing for speculative projects remains unavailable. Smaller suburban projects which can be developed quickly and financed largely with equity will be built.

Residential Market Demand and Prices Rise

Sam Guss, managing director of Sonnen-blick-Goldman Company's Multifamily Group, noted that residential prices, particularly in New York and other urban markets, had risen substantially during 1999 and would continue to rise in 2000. The demand for housing - including condominiums, rental apartments and even corporate apartments - will continue to be strong in 2000, as many Baby Boomers continue to move back to the cities. This will further increase the trend of the redevelopment and conversion of urban commercial property into residential use. Nowhere will this be more prevalent than in Downtown Manhattan, where the Downtown Redevelopment Plan and the 421 G tax abatement it provides has already resulted in the conversion of almost 5,000 apartments.

Guss said that the investor demand for acquisitions of multi-family housing in major cities like Boston, Chicago, San Francisco and Washington D.C. will also continue to be robust in 2000, partially as a result of national investors seeking geographic diversity. These investors are also attracted to the major markets where barriers to entry are high. By comparison, investor demand for multi-family in the Sunbelt cities will be relatively flat.

Retail and Shopping Center Investors Favor Primary Markets

"Sales in retail centers should continue to increase with the economy in 2000," said Andrew Oliver, managing director of Retail Sales and Financing at Sonnenblick-Goldman Company, "but there will definitely be erosion from e-commerce, as people have less time to shop and are increasingly using the Internet to buy basic commodities. However, bricks and mortar retailers will be investing heavily in expanding their own e-commerce businesses, which will capitalize on their already established brand recognition."

Prime malls will continue to excel in 2000. Neighborhood centers will continue to be strong and provide the "bread and butter" for many investors, and theater and entertainment development will continue in primary markets such as New York City. We will also see more public REITS team up with pension fund capital in major acquisitions of regional malls, Guss said.

Lodging Industry Continues to be a Global Business

Arthur Adler, managing director of Sonnenblick-Goldman Company's Lodging and Leisure Group, said he expected industry fundamentals to remain constant in 2000. "Most of the industry is looking at RevPar (Revenue Per Available Room) increases of between three and four percent. Occupancies will be relatively flat, with average room rates increasing at or above the rate of inflation, and profits will again increase for the seventh year in a row."

Adler added, "We will continue to see private capital, pension fund capital and public REITs joining with private equity companies as the major investors in hotels in the U.S." He noted that there are tremendous investment opportunities in luxury hotels and resort properties, particularly since there has been little new supply.

"The debt markets will continue to be active and so will the equity markets - with private and institutional capital," Adler said. "There will also be investments by lodging brands making strategic acquisitions, such as Fairmont and Omni, to grow their brands." In addition, companies such as Starwood, Carlson, Hyatt, Marriott and Wyndham will be using their capital to secure management in strategically important locations.

Adler concluded by saying that New York will continue to be "high on investors' lists, particularly properties that lend themselves to international management."