Forecast sees technology boosting real estate recovery.
Landauer expects the following to characterize the U.S. real estate market in 1997:
* The maturing economic expansion will bring the likelihood of greater geographic and industry balance.
* Centers of international commerce in goods, services and ideas will be magnets for real estate investors looking to exploit global business integration.
* Offices continue to be the "hot" property type. Home offices and laptops have become supplements rather than substitutes for conventional offices.
* The infusion of capital for new equipment has begun to stimulate demand for modern industrial facilities.
* Most retail properties remain a risky investment through 1997; however, investment flows in this property type are significant. Debt capital availability for retail properties is becoming more stringent.
* Hotel markets appear to have another good year ahead, although investors and operators will be challenged to find new growth niches.
"The current economic environment is one of distinct but comparatively moderate improvement, which Landauer views as a positive factor in sustaining growth. It has allowed the real estate industry to gradually reestablish its supply/demand fundamentals and to see renewed investment liquidity," says Hugh F. Kelly, national director of Landauer's Research Group and principal author of the Forecast.
"Regional economic structures have influenced property market performance for better or for worse during the past quarter century. Most recently, the advantage has gone to those areas producing technology and to those places putting it to use. One key to 1997 is the way in which geographic advantages will be shifting in the maturing recovery," says Kelly. "The intersection of the property markets and capital markets is one area in which national, rather than regional trends will predominate. Real estate investors need to understand both the form and substance of their investments. Public market or private placement, debt or equity; the vehicles by which the investments are carried ultimately ride the road of supply and demand."
The 1997 Landauer Real Estate Market Forecast has this to say about the major segments of the market:
Office Market Gathering Strength
Office vacancies nationwide dropped 1.5 percentage points in the past 12 months and will drop out of the teens by the start of 1997. Net absorption thus far in the recovery cycle has been 180 million square feet. Investors are flocking to this property type, and are betting that the office building as the primary location for the core U.S. businesses is here to stay for a long time. Landauer's Market Quality Ratings place Sacramento first with Portland, Phoenix, Orlando and Ft. Lauderdale following. Minneapolis-St. Paul should be robust in the next few years. The downtown markets of Boston and Washington, D.C. see substantial investor interest. Los Angeles and New York are starting a slow recovery in the central business districts.
Heightened Competition in Retail Market Will Cause Consolidation
Smart investors are seeking higher near-term returns in this declining market. Although property values are vulnerable to further declines, investments in retail properties are significant, with pension fund commitments remaining stable throughout the year. 1996 saw the creation of the largest retail REIT, the merger of the Simon Property Group and the DeBartolo Realty Group, resulting in combined control of 110 million square feet of space. Traditional regional mall sites are less available, so urban, airport and small secondary market locations are increasingly targeted for new expansion. While no retail market in the U.S. received a strong rating by Landauer, Chicago and Washington, D.C. were among 13 metro areas ranked acceptable.
Bright Outlook for Industrial Space
Goods production has been the stalwart of the economic upturn of the 1990s. This has spurred the revival of demand for warehouses, light assembly facilities, and research and development buildings. There is tremendous buying interest in these properties from investors including wealthy individuals, REITS, corporate owner/users and institutional investors. Landauer's Power Ratings in the three industrial subsectors warehouses, light assembly and R&D - have strengthened this year. Dallas tops the warehouse/distribution category, followed by Portland (OR), Chicago and Minneapolis. The Sunbelt leads the top ten light assembly markets, headed by West Palm Beach and Austin. R&D stellar performers include Boston, Denver and Seattle.
Multifamily Market Reaches Plateau
The housing market is becoming overextended and the rental vacancy rate has increased, reaching 8 percent, for the first time since 1988. The average Market Quality Rating for the 58 markets Landauer studies dropped from 2.79 to 3.72 (on a scale of 1 to 7). California is an excellent bet for multifamily investment, as the jobs boom continues and single-family home prices remain high. On its Apartment Consolidated Indicators Scale, Landauer ranks Seattle highest, followed by Honolulu, Boston and Portland (OR). Texas is seeing healthy trends, but Cleveland, Pittsburgh and Philadelphia are hampered by high vacancy rates and slow household growth.
Hospitality Market to Have Another Year of Gains
For the coming year, some further incremental gains in the hotel markets will be made, although the sharpest advances have been realized. Supply/demand fundamentals and investment liquidity are strong. REITs are still estimated to own only 2 to 3 percent of the industry, leaving ample room for growth. Among the buyers are the hotel chains themselves, international purchasers and a few pension funds. The nation's most prominent business and international tourism cities top the list of hotel markets, including Las Vegas, New York and Orlando. All three receive Landauer's highest possible Market Quality Rating.
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|Publication:||Real Estate Weekly|
|Date:||Dec 11, 1996|
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