ABN AMRO announces August production figures
Report indicates cautious optimism about 2005 real estate industrymortgagepress.comeconomic outlook, 2005, real estate industry
While real estate investors generally express cautious optimism
regarding industry performance in 2005, concerns over the economy
and job growth, coupled with the likelihood of higher interest
rates, are curbing expectations for a robust year, according to
Emerging Trends in Real Estate 2005, recently released by
the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP.
At the same time, the report noted that, "interviewees almost
without exception are confident that U.S. real estate markets can
avoid scenarios that would crater property values."
Emerging Trends in Real Estate 2005 is based on surveys
and interviews with more than 500 of the industry's leading
authorities and is considered to be one of the industry's
longest-running and most-respected annual investment studies. The
report anticipates that a key highlight of the coming year will be
the race between improving fundamentals (occupancy rates, leasing
rates, operating expenses, etc.) and rising interest rates.
"Can real estate supply/demand fundamentals improve enough in
2005 and 2006 to offset the potential negative impact of rising
interest rates on property values and pricing? Make no mistake, the
race is on," said the report. "For 2005, it all comes back to
interest rates, the economy and job growth."
The report cites several factors that could impede economic
•Federal government budget deficits;
•The balance of trade deficits;
•The weak dollar;
•Unprecedented levels of consumer debt;
•Inflationary pressures from high oil prices;
•Rising employer healthcare costs;
•Uneven job growth prospects;
•Queasiness over terrorism threats;
•Uncertainly surrounding the Iraq War; and
•The possibility of interest rate spikes.
The report notes that most new jobs being created have been
concentrated in service industries such as restaurants, temp
agencies, retail sales and building servicesniches that "don't fill
office buildings or have the earning power to generate growth in
other property sectors," said Emerging Trends. Part of the
reason is the maturing of America's dominant
businessestelecommunication, financial services and
pharmaceuticalswhich recently have experienced widespread
consolidations in order "to squeeze out efficiencies rather than
grow new jobs as in the past."
According to the report, many interviewees are looking to
healthcare and biotech to stimulate new job growth, particularly as
baby boomers age. Additionally, "advances in high tech should bring
the industry out of its bubble-triggered slump," Emerging
While the report points out that Internet technology has greatly
reduced the need for office support staff and expensive
headquarters space, Emerging Trends also reported that
many interviewees dismiss the recent public discussion concerning
offshore outsourcing as "overblown media hype."
In the words of one REIT executive quoted in the report, "The
economy is in transition and off-shoring is a moderator of growth.
It is not as dismal as the alarmists predict, but it is part of the
current lag and may be stalling some of the near-term
Emerging Trends survey participants increasingly voiced
concern over Americas schools and their ability to educate students
to adequately compete in a rapidly evolving global economy that
places a premium on math and science skills.
"We need to do better if we are to maintain our edge and keep
creating high-level, high-paying jobs at home," said an
Emerging Trends, now in its 26th year, examines the
outlook for real estate capital markets and contains a
comprehensive annual forecast for all categories of the commercial
real estate industry, including apartments, regional malls,
downtown offices, warehouses, community shopping centers, suburban
offices, research and development space, power centers,
full-service hotels and limited-service hotels. This year, the
report also tracked trends in the housing industry. In its "Markets
to Watch" category, Washington, D.C., New York City, southern
California and south Florida ranked as the top investment
"Big money continues to go bicoastal," said an interviewee.
"Middle America is a hard sell ... smaller markets must make do on
local country club money."
The top markets, noted the report, all feature international
gateways with physical growth barriers, solid economic
underpinnings and are magnets for immigrant labor. As for specific
characteristics making each favorable, Washington, D.C. is
considered a "government mecca" practically immune to economic
downturns; New York remains a world hub for finance and culture;
southern California has a strong mix of entertainment, defense and
biotechnology industry; and south Floridaspecifically Miamiis
benefiting from both a baby boomer influx and proximity to South
and Central America.
"As technology and global capital flows integrate economies and
industries across national borders, cities and markets enjoy better
prospects if they can link their fortunes to the evolving
international growth path," said the report. "The deck is
increasingly stacked against a Kansas City, Milwaukee, or
Indianapolis, which pale in comparison to American powerhouse
markets, but also faces difficulties competing to attract commodity
jobs in offshore face-offs against Dublin, Manila or India."
Despite having expanding populations, Dallas, Houston and
Atlanta lose support among investors, due to unrestrained
development and poor growth management, says Emerging
Trends, noting that the desire to avoid long traffic commutes
gives an advantage to markets with mass transportation networks. In
general, the success and resilience of the most attractive
investment locations can be attributed to 24-hour market
characteristics such as upscale infill neighborhoods near
commercial districts, convenient pedestrian-friendly retail, ample
recreational and cultural amenities and ample transit options,
according to the report.
For 2005, survey respondents predict that real estate will
outperform stocks (67 percent said yes, 33 percent, no) and bonds
(96 percent, yes, four percent, no.) They also forecast that
private real estate has the best asset class investment potential,
ahead of domestic stocks and public real estate. In the worst case,
should the economy tank from a geopolitical crisis or terrorist
attack, interviewees do not believe that property markets will
suffer a greater decline than stocks or bonds.
Regarding development opportunities, the report noted that
although commercial construction could pick up from this years
dormant levels, prospects remain restrained.
"Until markets achieve better supply/demand balance, investors
are more focused on buying land, gaining entitlements, and planning
projects rather than funding construction," said Emerging
Trends. However, the outlook for housing development remains
far more promising with infill and in-town housing again topping
the survey development scorecards. While the move back downtown by
empty nesters and childless professionals "cannot be ignored,"
demand should hold steady for suburban single-family housing "as
long as interest rates remain manageable," the report said.
"Master planned and New Urbanist communities tap into rising
homeowner demand for neighborhoods featuring more integrated land
uses and access to convenient amenities. People seem willing to pay
premiums for better planning."
For more information, visit www.uli.org.
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