Real estate prices rising, but at a slower pace.

Commercial real estate prices are high and rising, but the rate of price increases is slowing in the markets that have been most popular with investors.

Prices for suburban offices properties, apartment projects, and industrial warehouse/distribution facilities are at or close to replacement cost, and sellers are encountering price resistance among buyers, according to the current issue of the Korpacz Real Estate Investor Survey.

"Suburban office markets are where the slowdown in the pace of price increases is most noticeable," said Peter F. Korpacz, MAI, publisher of the quarterly Survey. Prices are flattening in the suburban office markets, as prices reach replacement cost. "This is the cap that is causing many institutional investors to turn to CBD office product and other property types," said Korpacz.

Many buyers who were active in suburban markets only six months ago are unable to find attractive deals. "They simply are not willing to pay the current prices," Korpacz said. In addition, the available product is not so desirable as it was last year. Consequently, the volume of deals has dropped significantly.

Investors are turning to CBD office buildings as downtown office conditions continue to improve. Midtown Manhattan, Boston, and San Francisco are the most popular cities. However, some downtowns that still have high enough vacancy rates to be considered troubled, such as Houston, Los Angeles and Miami, are appealing to investors who are still hoping to catch a bargain.

CBD office buildings are still priced substantially below replacement cost. Participants in the Korpacz Survey report that discounts generally range from 10 to 50 percent. Consequently, CBD office investments can offer an excellent opportunity for return. Investors anticipate significant value appreciation in accord with rising rents.

Private Real Estate Dividends Outpace REITs and S&P 500

An analysis of dividends from privately owned real estate, REITS, and the S&P 500 in the Korpacz Survey shows that average annual real estate dividends were higher than REIT dividends and S&P 500 dividends in every year since 1990. The likely reasons that the private market real estate dividends are higher than public market dividends, according to Korpacz, are the burden of management and lack of liquidity in direct private ownership of real estate. In the public market, there is no management burden and the opportunity for liquidity is present daily.

Historically, the return on stocks has been considerably lower than the return from all forms of real estate ownership. Stocks have consistently provided the bulk of their return in appreciation of the stock over time.

Korpacz admits that, because of inherent differences, comparisons among private real estate, REITS and stocks are not perfect. "However, they do show useful trends," said Korpacz, who measures private real estate dividends through a composite average initial rate of return in all-cash transactions in the 16 commercial markets he surveys - the Korpacz Dividend Indicator (KDI).

During the 1990's, the spread between the KDI and REITs has fluctuated from minus 176 basis points to the historical high of 349 basis points, reached by January 1, 1997. The average spread over the past seven years is 129 basis points.

Changes in the spread between the KDI and the average S&P 500 during the 1990's range from a low of 425 basis points in 1990 to a high of 744 reached by January 1, 1997. The average spread over the past seven years is 617 basis points.

The Korpacz Real Estate Investor Survey is published quarterly by The Korpacz Company, Inc. In addition to the Survey, the Frederick, MD-based firm publishes the Korpacz Real Estate Source Directory, a database of complete descriptions of information products and services and productivity tools for real estate, as well as articles and Internet resources. For information on these and other products, call (301) 8293770 or visit www.korpacz.com.