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Coopers & Lybrand sees rapid improvement.

Doomsdayers" predictions of the future of real estate are incorrect, according to a recent analysis by Coopers & Lybrand's national Real Estate Group. A much stronger and rapidly improving real estate industry is a more likely scenario, Coopers & Lybrand concluded after an analysis of statistics and information provided by Coopers & Lybrand, CB Commercial, The F.W. Dodge Company, the U.S. Bureau of Labor Statistics, the U.S. Bureau of the Census, and the U.S. Department of Energy.

"Doomsday predictions may make good copy, but they can make for bad business decisions," says Dr. Bjorn Hanson, chairman of Coopers & Lybrand's Real Estate Advisory Services Group.

Some real estate analysts have drawn attention to their firms through gloomy pronouncements about the future of the real estate industry in general, and the likelihood that the office space market in particular may not absorb its oversupply for as much as 20 years.

These predictions depend upon superficial arguments that don't hold up when closely analyzed, according to Hanson. For instance, many of these predictions assume that 1992 and early 1993 trends will continue indefinitely.

Recovery must come from employment growth, pessimists argue, and, since the end of the recession, job growth until quite recently has been modest at best. The doomsdayers offer a number of factors and trends - the slowdown of population growth, sluggish labor force growth rates, and flattening labor force participation rates.

Hanson points out that population growth slowed between 1980 and 1990 Census counts, but future growth will increase, according to the most recent Census estimation. The nation grew at 0.9 percent per year between 1980 and 1990, and, since 1990, the rate has been slightly higher, at 1.1 percent per year. Population growth estimates are being adjusted upward to account for the high fertility rates, for example, among immigrants.

Employment growth comes from a combination of population growth and increased labor force participation rates. As these projections indicate, future population growth may not slow significantly, if at all.

The pessimists also cite a decline in labor force participation rates (the percentage of the population over the age of 16 that works) among women, which grew by only 1.3 percent between 1980 and 1990 compared to 1.6 percent per year during the previous 40 years. The female baby boomers, they say, only deferred having children and are now staying home.

While baby boomers' growing family size does appear to be a trend, increasing the likelihood of lower labor force participation for one parent, it seems unlikely that this well-educated group of women will stay out of the labor force forever, Hanson says. The rise in the female labor force participation rate has been steady, increasing from 55.1 percent to 65.3 percent, from 1950 to 1990, and it is still rising, although at a slower rate.

The male labor force participation rate, pessimists point out, also has been dropping and now stands at 74.4 percent. Hanson counters that the male labor force rate actually has been dropping since the 1950s, at the rate of 0.2 percent per year. The most recent drop, of less than one-tenth of 1 percent, between 1980 and 1990, is actually a moderation of that trend. More importantly, the labor force participation rate for both sexes increased by 0.5 percent per year to 65.3 percent from 1980 to 1990.

A real labor shortage, one that promises good jobs with high pay and attractive benefits, should lure both men and women back to work, Hanson argues. Evidence of this lies in the vast differences in labor force participation rates among metropolitan regions. The high female labor force participation rate in Washington, D.C., courtesy of good federal government jobs, provides an example of the competing trend. Minneapolis-St. Paul and Raleigh-Durham have high female work rates, too. And, all three locations also have high labor force participation rates, in general, demonstrating that good jobs lure all workers into the labor force. A labor shortage would also promote a reversal of the current early retirement trend for men.

The pessimists also point out that there is substantial vacant office space that must be absorbed before office rents can recover. National office vacancy rates are still between 17 and 18 percent even though new office construction is less than 10 percent of the annual average between 1986 and 1990.

They argue further that the true vacancy rate may be higher than the published rate because of "phantom" vacant space, space that is leased but not used and that would be offered for sublease if the prime lessee thought anyone would take it.

Real estate markets are inherently local. An examination of local markets provides evidence that not all vacant space needs to be absorbed for a market to recover. Shortages of large blocks of Class A space are already manifest in several markets including parts of Washington, D.C., Atlanta, and even Midtown Manhattan. Further, some markets, like those in Texas, typically register higher vacancy rates than such spatially-constrained,anti-growth places as San Francisco and Boston.

Compounding these vacancy problems, doomsdayers declare, are such new space utilization concepts as the "virtual office," the "just-in-time of-flee," flex-time, work-at-home and hoteling, that have the potential for significant, permanent reductions in the need for office space overall.

Hanson points out that these concepts have captured the attention of the press not because they are typical, but because they are unique. Even the introduction of the personal computer, a true workplace revolution that is now more than 15 years old, has not led to the widely predicted wholesale displacement of offices, although millions of offices and homes now have personal computers.

There are few hard statistics on the prevalence and impact of these new work arrangements, but some issues are clear. Hoteling, a strategy that eliminates dedicated workspace for employees with rigorous travel schedules, is not new. Accounting firms have used it for years.

"These concepts have caught the attention of the press not because they are typical, but because they are unique."

Changes in how firms use space will occur because these are workable for certain types of professional service fins, those where employees spend large portions of their time on the road or in their clients' offices. But the number of firms that change their leases in any one year is small compared to the size of the occupied space inventory. Changes, when they occur, will occur only "at the margin" in a small percent- age of all firms. In the interim, most office-based firms will continue to do business as before, both because they are locked into their space for the duration of their lease and because the traditional space utilization formats still work for them.

Hanson maintains, however, that the main reason for rejecting the concept that the down cycle of the office market will continue for a long time is experience with the variability of local real estate markets. While the national real estate office market does not appear to be in recovery, our investigations of local markets demonstrate that an increasing number are on their way to stabilization.

"It also needs to be remembered how the underlying economics of ownership have changed," says Hanson. Debt restructuring, lower interest rates, property tax reductions, dramatic operating cost reductions, reduced management fees, and other changes have created profit at higher vacancy rates than in the past.

Hanson predicts that a year from now it will be clear that the doomsdayers have overstated the negatives. The trend is decidedly upward, he says, and is accelerating in strength.
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Title Annotation:Real Estate Advisory Servicesreports on analysis of U.S. real estate market
Publication:Real Estate Weekly
Date:Feb 9, 1994
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