 |
'This Time it is Different' - The Five Most Dangerous Words in Real Estate? |
|
|
'This Time it is Different' - The Five Most Dangerous Words in Real Estate? |
ULI's Mid-Year Real Estate Forecast Cuts to the Chase
WASHINGTON, DC -- (May 2, 2002) -- Although the U.S. economy appears to recovering from the mild recession, most sectors of real estate will continue to feel the pinch for the next 12 months, according to the Urban Land Institute's (ULI) mid-year Real Estate Forecast. With the exception of housing, real estate performance will likely lag behind the economy, the outlook says, cautioning that rising vacancies coupled with declines in commercial rents and property values have reduced profitability for many owners. Several ULI members provided industry insights for the report, which included a member survey.
"This is a market dominated by players with a great deal of capital, short memories, long on hope, and with a strong belief that 'this time it is different' -- the five most dangerous words in the English language," says Stanley L. Iezman, president and chief executive officer of American Realty Advisors in Glendale, Calif. The forecast notes that recent encouraging economic news has led to predictions of a 4 percent growth rate in the U.S. gross domestic product by 2003. However, despite the likelihood of improvement for the economy, commercial real estate is still reeling from the sharp economic downturn of last year. In particular, the lack of job growth has been the single most damaging factor affecting the industry, the study says.
"Negative job growth and a rising unemployment rate have greatly undermined both consumer confidence and the demand for real estate, especially office space, but industrial, retail, hotel and apartment properties as well," the forecast says. "More so that in the last recession, the commercial sector of the real estate economy will mirror the performance of the overall economy ... The residential sector, on the other hand, will likely continue to run steadily forward, since it was immune from the recession and thus is in no need of recovery."
Forty-nine percent of the respondents to ULI's forecast survey expect the profitability of real estate firms to be "good to excellent" through mid-2003, compared to 60 percent one year ago. Eleven percent are expecting profitability to range between modestly poor and abysmal. The ULI forecast projects strongest profits among real estate services firms, followed by financial services/institutional investors, residential or resort developers, private real estate operating firms and developers, public real estate operating companies, and lastly, real estate investment trusts.
"Confidence in across-the-board real estate will not return until well into 2003. As usual, those lacking vision and courage talk in yesterday's terms while tomorrow's leaders see a new and better future, albeit a future different from yesterday," notes Anthony J. Trella, president and chief executive officer of The Meranth Company in Deerfield Beach, Fla. According to the forecast, development prospects will be strongest for housing in general: it ranks master-planned communities, middle-income detached housing, and infill housing as having the most potential. Urban mixed-use properties, mixed-use town centers and attached housing are also expected to offer modestly good prospects.
Offering the least potential are upscale/luxury hotels; followed (in order) by downtown office space, high-rise suburban office space, resort hotels, mid-price/economy hotels, regional malls and low-rise suburban office space. The report notes the continuing demand more infill, mixed-use urban projects, driven by the increasing number of childless households who are seeking a change in living and working arrangements.
"In underserved areas such as Los Angeles and the Bay Area, residential activity should remain very strong ... these areas have high barriers to entry, high land costs, and little available land, In turn, hat should drive selected, conveniently located and well-executed retail and mixed-use developments designed and scaled to meet the needs created by the residential unit growth. This bodes well for urban cores and first-ring redeveloping suburban areas," says Alex J. Rose, director of development for the Continental Development Corporation in El Segundo, Calif. ULI survey participants voted Washington, D.C., as the "most favored" investment market, with New York, Los Angeles, Chicago and San Diego rounding out the top five.
The forecast comments:
San Francisco ranked highest among the markets to avoid through mid-2003, although that area also received several votes as a most-favored investment market. Overall, the negative votes outnumbered the positive, with respondents citing the severity of dot-com collapse, leaving San Francisco with vast amounts of empty commercial space. Other least-favored markets include Atlanta, Dallas, and Houston, "no doubt due in part to their pro-growth business environment and penchant for overbuilding," the forecast says. Seattle is also in the "top five" list of least promising areas, mainly because of the retrenchment of several of its major firms.
Low- and middle-income multifamily rental properties are expected to be the top performers in terms of rent increases over the next 12 months, followed by neighborhood/community shopping centers and warehouse industrial properties. However, even with the top ranking, these property types will see only fair prospects for increases, the forecast predicts.
Luxury hotels, high- rise suburban office properties, resort hotels and downtown office space have the poorest prospects in the forecast, offering few opportunities for rent increases. The retail sector appears the least affected by the weakened status for the commercial real estate industry, primarily because "the prospects for attractive rent increases were not particularly favorable last year and have not changed much since," the forecast says.
The for-sale housing sector is expected to fare much better than the commercial side, with infill housing and middle-income detached homes experiencing fair to strong price increases. In general, consumer-driven real estate markets will fare better than business-driven markets over the coming year, the forecast concludes. "Uses catering to the boomer generation -- second homes, retirement homes, and lifestyle amenities -- and their children (starter homes) will do well," says Christopher Kurz, president and chief executive officer of Linden Associates, Inc., in Baltimore, Md.
ULI's forecast also covers Europe, and found that, similar to the United States, Europe's slower economic growth has dampened the performance of the real estate sector. Growth for 2001 was actually weaker than had been anticipated, and 2002 growth is expected to be weak, possibly averaging only 1.3 percent for Europe as a whole. However the growth rate is expected to rise to 2.7 percent in 2003, and be even higher in eastern Europe, which is also experiencing steadily declining inflation. This anticipated improvement is likely to boost Europe's property markets, the forecast notes.
The outlook for the nation's economic recovery in relation to the global economy, and potential obstacles hampering the U.S. rally were discussed at ULI's recent spring council forum by Marvin Zonis, professor of the graduate school of business at the University of Chicago in Chicago. According to Zonis, while it is possible that the U.S. gross domestic product growth rate will reach 4 percent by 2003, there are "considerable risks" to that outlook. These include the deteriorating situation in the Middle East; the possibility for more terrorist attacks against the United States, particularly against businesses; a spike in oil prices; deteriorating relations with North Korea; and the possibility of "more Enrons." Any of these factors could damage the nation's prospects for substantial economic growth, and curb possibilities for growth in the real estate sector, Zonis said.
Paul Kennedy, J. Richardson Dilworth professor of history at Yale University in New Haven, Conn., and director, Yale University International Security Program, also made a presentation at ULI's forum, discussing the relationship between global population growth, poverty, violence, and economic and social stability. He cited statistics from the United Nations showing that the world population is expected to rise from the 2000 level of 6 billion to about 9 billion by 2050, with most of the increases occurring in the least developed, poorest, and least educated areas around the world, including countries in Africa and Asia. "Demographics are the single most important indicator of the future," Kennedy said.
Despite the United States' current economic slowdown, the long-term prospects for economic prosperity remain high, given the nation's comparatively lower levels of population growth, higher per capita income, education and employment opportunities and the availability of healthcare, Kennedy noted. "The richer countries will continue to get richer, because in the poorer countries, any additional productivity will be swallowed by a new mass of people," he said. "Technological improvements in the United States will keep making us more productive and richer." ULI's forecast is available at http://research.uli.org/DK/Data/re_Data_4cast_fst.html. The 64-page report is divided into downloadable sections by property type.
The Urban Land Institute is a nonprofit education and research institute supported 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 has nearly 17,000 members representing all aspects of land use and development disciplines.