Weak fundamentals and a limping economy will likely mean another year of doldrums for the real estate industry. Rising vacancies, downward rents and corporate layoffs will soften U.S. real estate markets for yet another year in 2003. According to Emerging Trends in Real Estate Report 2003, published by Lend Lease and PricewaterhouseCoopers: "Real estate's attractiveness has been income security, which could come under stress the longer the economy remains sluggish. Despite the 'torpid' near term outlook, most indicators point toward a recovery in 2004." Returns for 2003 are forecast in the mid- to upper single digits and annualized long-term returns (over the next five to seven years) will concentrate in the 7 to 8 percent range. The report indicates investors can expect solid returns this year in certain property types, such as warehouses in major transportation hubs, offices in established 24-hour markets, apartments and grocery-anchored shopping centers. Property sectors to avoid include most suburban buildings, offices in 95 downtowns and development projects. Overall, the top five markets this year look to be Washington, DC, New York, Southern California, Chicago and Boston. The report identifies specific indicators for a sector rebound in 2004 that include greater marketplace structural stability from the dominant REIT and pension find presence; limited imprudent development via relatively controlled capital flows; and attractive yields and positive returns that will continue to outpace most other investment vehicles. Chugging Along While deflation remains a possibility, many believe it won't happen. "The economy will continue to chug along in a modest way," said Leslie Kautz, principal at Angeles Investment Advisors LLC. "We're the least-bad sector," said Kenneth Rosen, chairman of Lend Lease Rosen Securities, about the REIT industry. Rosen forecast a 60 percent chance of a full-blown recession and a 40 percent chance of a slow recovery. "Even with a 60 percent chance of recession in 2003, I think there's a pretty good chance we'll skate through it," Rosen said. Rosen also predicts 2003 will bring another 5 percent decline and oversold apartment, hotel and office markets. Mike Kirby, principal, Green Street Advisors, Inc., said, "'With stable returns of between 7 and 10 percent predicted for the next five years, real estate is boring. But boring is beautiflil right now. "We've had a 100-year flood on demand in apartment land and office land," Kirby said. "Both sectors are performing a lot worse than expected." Pop Goes the Bubble? The housing bubble that seemed to be on everyone's lips last year may begin to deflate as some experts predict home prices have risen too &r out of line with economic fundamentals and will be due for a market correction. Bill Staton, a certified financial planner from Charlotte, said in a recent "CBS MarketWatch" report: "Way too many families are way too stretched in their real estate obligations, combined with all the other debt they owe. The bubble is going to pop during the next several years--if nor sooner." In many high-priced markets, values have been driven up not by speculative fever but by the fundamentals of supply and demand, said Raphael Bostic, director of the USC Casden Real Estate Economics Forecast. Population growth, immigration, the strong economy of the 1990s and the lowest mortgage interest rates since the 1960s helped increase demand for housing nationwide, Bostic said. But supply has not kept pace with demand in many regions because of high land costs, opposition to development, builders' liability concerns and a drawn-our permitting process. However, other industry experts maintain there will be no pop of a price bubble in the real estate market, although they acknowledge emerging local bubbles in some areas of the country. "One of the primary threats to the housing market is the decline in employment," said Stephen Percoco, of the Rahway, NJ-based Lark Research Inc. "A housing market built upon a foundation of declining employment is vulnerable to a sharp slowdown," he said.
January 1, 2003