Research continued strength in U.S. property markets.

A new research report released by AEW Capital Management (AEW), a leading real estate investment advisor, concludes that the current economic environment remains .favorable for continued strong performance from real estate.

AEW Research, the firm's in-house research arm, forecasts that interest rates are likely to remain stable through the end of the year, as economic growth slows to more sustainable rates and inflationary risks remain tame.

"As we move through the seventh year of this economic expansion, we continue to be amazed at the combination of solid economic growth and minimal inflation," said Douglas M. Poutasse, managing director of research at AEW. "The favorable economic environment has served to create a very auspicious setting for U.S. property markets. Overall economic conditions, the extraordinary flow of public and private capital into real estate, and the continued restraint being shown by property developers have combined to create the best real estate climate we've seen in the past 15 years. It's characterized by low vacancy rates, steady growth in rental rates, and rising property values in virtually all areas of the country."

AEW expects REIT returns in the high teens to 20 percent for the year 1997, based on the continued strength of the nation's property markets and strong interest from institutional investors. AEW points to a recent "phenomenon" I occurring within the marketplace: the largest REITs have demonstrated the greatest ability to grow via the acquisition of properties and companies. Investors have rewarded this growth with the highest multiples or lowest cost of equity capital. Similarly, debt markets are rewarding these companies with unsecured, investment-grade debt ratings.

"This virtuous cycle seems destined to continue for the short-term, as institutional capital-flows into the REIT market continue to accelerate," said Poutasse. "All else being equal, institutional investors are drawn to the apparent liquidity provided by the larger REITs. In the short-term, we expect these larger growth companies will continue to attract the lion's share of new capital in the market, driving their pricing and returns higher."

New Construction

Although the volume of debt and equity capital flowing into real estate continues to accelerate, particularly via the rapidly growing public markets, these capital flows have not triggered excessive new construction. AEW attributes this, in part, to the increased discipline that broader public market scrutiny has brought to real estate development.

"There is a fundamental shift occurring in the real estate industry towards ownership by operating companies rather than entrepreneurs," Poutasse said. "This, coupled with the rapidly accelerating trend towards public rather than private financing of these entities, has changed the real estate industry forever - and for the better. And so far, one result has been that we've avoided much of the over-building that occurred in the mid-to late-1980's,"

AEW Market Outlook is a semi-annual review of the nation's real estate markets. The report covers a variety of topics, including public and private real estate investment performance, capital market developments and property-type fundamentals.