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FORECAST: Real Estate Outlook Darkened by Lingering September 11 Implications

December 24, 2001

LOS ANGELES - Fallout from the Sept. 11 terrorists' attacks will severely impact the real estate industry through next year as corporate America grapples with a shift in real estate strategy following massive layoffs, high-profile bankruptcies and a drop in consumer spending, according to Stan Ross, chairman of the board, USC Lusk Center for Real Estate.

Ross advises real estate owners, investors and property managers to develop entirely new business models to reflect the corporate changes in planning for office, industrial and retail space.

He also cautions real estate firms to align their business strategies with their corporate clients to reflect the need for heightened security, the rise in insurance premiums and a tightening of capital.

"Companies are more concerned than ever with the safety, stability and continuity of their operations," Ross says. "Businesses that choose to scatter their operations among multiple suburban settings will spend more on building security and less on amenities.

"Owners and property managers have to collaborate closely with tenants to assess risk exposure in new and existing buildings, and to decide who will absorb the costs of added security personnel and monitoring devices plus rising insurance premiums."

He adds that building owners may be able to offset some of these new costs by trimming operating budgets.

Ross says he believes that ultimately there will be a legislated resolution to the issue of insurance coverage for terrorist risks. In the meantime, "financing for new development will be impacted as lenders wait to see when terrorism coverage will be available from insurers," he cautions.

Ross says he feels the institutional players will not overreact to the insurance shortage, however, "because they understand this level of risk and continue to have confidence in real estate as a financial instrument."

Ross predicts more alliances and partnerships of real estate services firms, security agencies, architects and engineers could be formed to combine resources in designing and developing security systems for new and existing structures.

Since all levels of government will increase spending on security in public transportation and meeting places, he warns, the added costs might filter down to building owners via higher property taxes or special assessments.

The 2002 outlook for real estate development and investment also weighs heavily on whether the economy can pick up speed in the second half of the year, Ross says.

If the economy remains in a recession next year, investors could pour money into acquiring properties at discounts from sellers who have decided not to wait for values to rebound.

If the United States bounces back in the second quarter, he adds, leveling off or slightly rising interest rates might curtail some new projects, but at the same time any change in inflation would move up commercial and residential property values. A stronger economy also drives demand for new office space.

Ross says the real estate industry needs clear vision, sound planning and strong execution to deal with the new and uncertain environment in which we are living.

"It is time to design the 'new world plan,'" Ross says. "Firms have to be flexible with their business plans in the next year because the real estate industry has a responsibility to get the country back on track."