Stock market to be barometer for real estate in '99.

Public companies will determine real state prices in 1999 - even if they are not the primary buyers. If they do dominate transaction activity, as they did in 1997 and the first half of 1998, prices could rise steeply. If they sit out, as they have since last summer, prices will likely remain stable or rise moderately.

Public market ownership of real estate has changed the playing field. The recent bull runs in the REIT and CMBS markets runs and their abrupt halt - bring home the fact that real estate conditions are not the only arbiter of property prices. The Fall 1998 price slide, at a time when market conditions are stronger than they have been in a decade, is evidence that price volatility is now tied to factors not directly related to real estate.

Last Fall, when Wall Street analysts cut REIT ratings and REITs stopped buying, real estate prices dropped as quickly as they had soared during the REIT buying spree.

"If you want to know the direction of the real estate market during 1999, look at the stock market," said Peter F. Korpacz, publisher of the 1999 forecast supplement to the Korpacz Real Estate Investor Survey. "How the stock market fared yesterday will indicate how the real estate market is setting up for today."

Next year will be a good time to invest in real estate, according most of the active investors who participated in the Korpacz forecast. Newly reduced prices convinced them to forge ahead with acquisitions. Of course, a strong national economy, recovery in the global economy, rational development and sufficient credit are necessary to foster a strong real estate market.

Buyers and Sellers

Pension funds will be the primary buyers of institutional-grade property in 1999, according to 79.2 percent of respondents. REITs ranked third, behind leveraged equity investors. The REITs that are most likely to be active buyers are well capitalized and want individual properties, not portfolios. Among foreign buyers will be Europeans, especially Germans.

Capital

While the five-year flood will be stemmed somewhat, there will be no shortage of either debt or equity capital in 1999. Debt capital will be abundant, according to 63 percent of respondents. On the equity side, 48.2 percent look for abundant capital.

In a 180-degree turn from recent years, investors will not be looking to the public markets to be primary providers of either debt or equity capital. CMBS are ranked "dead last" as a source of debt capital. Ranking of capital sources follows: Equity pension funds; leveraged equity investors; opportunity funds; REITs; foreign investors; individuals; life insurance companies; and owner-users. Debt - life insurance companies; Domestic banks; pension funds; credit companies; REITs; non-REIT securities; foreign banks; and CMBS.

Where to Invest

The markets that receive good marks for positive absorption, high rents, low vacancy rates and limited construction head the list of metropolitan areas that offer the best real estate investment opportunities next year.

For the second consecutive year, Los Angeles wins by a huge margin. A whopping 70.5 percent of respondents selected Los Angeles or Orange County. San Francisco is in the second spot, up from third last year. Running down the East Coast, respondents like New York, Boston and Washington, DC. Atlanta is still on the list, although its office and apartment markets are thought to be at least on the verge of oversupply if not overbuilt already.

Los Angeles: The metropolitan area is thriving, owing to the strength of its core industries as well as expansion in others. The area's five major airports and the nation's largest port complex provide something of a cushion against economic downturn. Even with reduced volumes of exports due to current world economic problems, import volumes are expected to be robust next year. As growth in the entertainment and allied industries cools a bit, the technology, telecommunications, health care, tourism and business service sectors are creating the new jobs necessary to sustain the Los Angeles area economy.

San Francisco: The city and Bay area economies are robust. Supporting healthy real estate fundamentals, job growth in the region is strong. Growth-oriented industries, including multimedia and publishing, are likely to take up some of the slack resulting from softening in the high-tech area. Silicon Valley companies are beginning to feel the pain of the Asian financial problems. However, they will snap back as soon as the Asian economies do. While all San Francisco property types are in demand by investors, office buildings are foremost. Both the downtown and suburban office markets show the lowest vacancy rates and the highest rental rates in the nation.

Chicago: The metropolitan area's greatest economic asset is its widely diversified economy. Amid signs that job growth is slowing from record highs, manufacturing is softening due to a decline in exports to Asia, but jobs in financial services are increasing at about twice the rate of overall employment, and FIRE employment is up from one year ago.

Property Preferences

Investors will look to city properties CBD office buildings and urban apartments - for the promising investment opportunities in 1999. All property preferences, in rank order, are: CBD office buildings; urban apartments; industrial R&D; suburban office buildings; industrial warehouses; suburban apartments; neighborhood and community centers; regional malls; hotels/motels; power shopping centers.

Retail

For yet another year, the outlook for retail real estate is mixed. Values will hold or increase slightly for top-tier malls and shopping centers that are anchored by discounters as well as grocery- and drugstore-anchored neighborhood centers. These will remain pretty well insulated from the vagaries of consumer spending and are most likely to benefit from increases in consumer spending.

Entertainment venues in the form of multi-screen cinemas and theme restaurants are becoming de rigueur in regional malls. Now, using the same tactic, downtowns are adopting entertainment in their battle to reclaim shoppers. Cities and older suburbs view entertainment development as an urban renewal tool and often offer incentives or at least chip in to help with parking.

Office

Downtown office buildings are one of the last property segments that are priced well below replacement cost in most cities. In addition, rents in some buildings are still below market because the leases were signed at low rates when downtown landlords were struggling. Their struggle is over now, and tenants are feeling the pinch of tight space markets translated into high rents.

World-class CBDs, including Boston, Chicago, New York, San Francisco, and Washington, D.C. will again attract the most attention. Investors also like Denver, Houston, and Seattle.

Respondents expect more CBD development next year, forecasting a 6.7 percent change rate in the amount of development. Most (81.3 percent), think the amount will be appropriate to demand, however, and they do not anticipate overbuilding. Suburban development will cause overbuilding, according to a huge majority (82.9 percent) of respondents. They forecast a 6.8 percent change rate.

Industrial

The R&D segment will offer more promising investment opportunities than warehouse-distribution facilities, which are priced at or above replacement cost. Multitenant R&D incubator industrial properties are usually below replacement cost.

The R&D properties investors favor industrial parks in areas where there is a large concentration of high-tech industries. The new flex buildings are more sizable than their older cousins. They can be as large as 200,000 square feet, with approximately 25 percent of the space devoted to office use.

Multi-Family

Even with a slowing economy and lower projected job growth over the next several years, investors are confident that there will be sufficient demand for apartments to continue to make this a good investment. Even with low interest rates encouraging home ownership, lifestyle trends support the expectation of a strong pool of renters. Young people tend to wait longer to buy homes and empty nesters choose the convenience, service and amenities that go with renting. With such a tenancy, respondents are confident in tenants' financial stability; 80 percent believe that it will be a positive factor in 1999.

Investors are primarily attracted to areas with high barriers to entry. They also like urban infill locations. High-rise rental buildings are the multi-family property of choice.

Development Land

With new construction of every property type on the horizon, demand for development land will continue through 1999. The amount of land transaction activity will decrease form this year, however; 78.9 percent of respondents say that there will be more transaction activity. This compares with 94.1 percent last year.

The Korpacz Real Estate Forecast is based on an extensive questionnaire, as well as proprietary interviews with prominent real estate market players. More than 80 active investors participated.

The Korpacz Real Estate Investor Survey is published quarterly by The korpacz Company, Inc. The Frederick, MD firm's Korpacz Real Estate Source Directory is a cumulative Internet database containing articles and descriptions of thousands of real estate data products, software, books, Web sites, education programs and local government publications. For information on products, call [phone] or visit wwwkorpacz.com.