ULI predicts continued growth through mid-1998.

The fundamentals of supply and demand are functioning in classic fashion during a period of unusual equilibrium in the domestic real estate industry, reports a new forecast released by the Urban Land Institute (ULI), with the result that all 56 major metropolitan areas in the United States will enjoy improved property performance, spanning the full range of property categories, over the next 12 months.

For half of those markets, led by Seattle, Detroit, San Francisco, Phoenix, and Colorado Springs, the news will only get better as rates of improvement in performance, measured by changes in effective rents, accelerate through mid-1998, ULI predicts in the second edition of its annual publication ULI 1997 Real Estate Forecast: MidYear Outlook by Sector, Area, and Enterprise, one of the most thorough and complete 12-month prognostication about the nation's real estate industry.

Thirty of the markets surveyed can expect decelerating or flat rates of growth, with Charlotte, Albuquerque, Salt Lake City. Denver, and Louisville, slowing down the most dramatically, the report predicts. But even in these markets, the tight tug between supply and demand is likely to produce "soft landings" and quick reversals from the slowing trends.

"We see at least 12 more months of broad-based improvement in property performance, and could be looking at a trend that will last through 2000," said Joseph C. Canizaro, president of the Urban Land Institute. "Despite relatively easy access to capital, instances of over-building continue to be rare and Sustained excesses are hard to find."

The report portrays an industry at the mid-point of a cycle, with most real estate sectors near optimum levels of rent and value growth. The limited construction underway is serving to moderate rent increases but not suppress them, creating a plethora of solid real estate markets and sectors in which to invest across the country. The real estate industry itself is relatively stable and increasingly profitable for most of the players in the business.

"The key to the duration of the upswing will be the performance of the overall economy, as the real estate industry maintains a demand-driven posture, especially in commercial categories like office, industrial, and retail," said Canizaro. "The real estate industry may well enjoy another 24 to 30 months of stable growth, provided the larger economy continues its expansion."

The study presents its industry forecasts from three major perspectives, predicting and comparing the relative likely performances of 15 property types and seven categories of real estate-based businesses, in addition to the 56 geographical markets.

Among property types, the findings suggest that the office sector will experience the most growth. For the second consecutive 12-month period, suburban office properties will lead all other types, achieving the highest growth in rent increases. Downtown office buildings will be close behind, a reflection in part of the tightening suburban marketplace, displacing the warehouse industrial sector, which drops to third from its second place slot a year ago. The downtown and suburban hotel, mid-income and high-income multi-family residential, and R&D industrial property types hold the next five places on the list, with all expected to achieve rent increases in the moderate range of three to 4.9 percent. Strip shopping centers and regional malls respectively will post the weakest performance increases among all property types, with neither sector expected to top one percent in effective rent increases.

Underscoring the equilibrium that has descended upon the industry, only three of the 10 property types surveyed can expect to see faster gains in performance through mid-1998 than they experienced in the previous 12 months. High income multifamily residential in particular will see a significant drop in its rate of increase, suggesting at least one market has likely reached its maturity.

Growth among real estate businesses will also accelerate moderately through mid-1998. The study found that profits, value of enterprise, and volume of business enjoyed by seven categories of real estate-based concerns are all expected to rise during the 12 months, and that the rate of increase across the board will significantly outpace the growth achieved in 1996-97.

Leading the industry will be the brokerage and marketing segment, which should see increases in the volume of business it undertakes and moderate increases in both profits and enterprise value. Commercial real estate development firms will lead the industry in profit growth and growth in the value of enterprises, a significant improvement over last year when they ranked only fourth, and a reflection of the strength of the office, hotel, and industrial property types.

Among the business sectors that could see a slowdown in profit growth will be the real estate lending/financing segment. The findings suggest that such operations will feel competitive pressures as the availability of capital from a variety of sources increases, putting pressure on spreads and profits.

The report concludes that, taken together, the forecasts suggest that the operative aphorism for the real estate industry might read "Things will be free until '99." The widespread equilibrium has created a climate in which demand is driving moderate increases in performance, which in turn are boosting values and general profits among the industry's businesses, all without sparking the boom mentality that might prematurely curtail the duration of this stable period.

The ULI 1997 Real Estate Forecast: Outlook by Sector, Area, and Enterprise is based on year-end data, surveys of hundreds of ULI Council members, the analyses and opinions of local market experts, and a blue-ribbon panel of reviewers who, together, comprise the leading investors, owners, and advisors in the real estate industry.

The Urban Land Institute is a non-profit education and research organization that is supported and directed by its members. Its mission is to provide responsible leadership in the use of land in order to enhance the total environment. Established in 1936, the Institute today has nearly 13,000 members and associates representing the entire spectrum of the land use and development disciplines.

To order the ULI 1997 Real Estate Forecast: Mid-Year Outlook by Sector, Area, and Enterprise (order number U08) call 1-800-321-5011. The cost for ULI members is $24.95; the cost for non-members is $29.95.