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USC Lusk Center Chairman: Real Estate Outlook Darkened by 9-11 Implications

December 12, 2001

The Chairman of the board of the USC Lusk Center for Real Estate today painted a dire outllook for the real estate industry in 2002 because of lingering implications from the terrorist attacks.

Stan Ross said fallout from the Sept. 11 attacks will "severely" impact the 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.

Ross said real estate owners, investors and property managers should develop entirely new business models to reflect the corporate changes in planning for office, industrial and retail space. He also cautioned 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 said. "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 added that building owners may be able to offset some of those new costs by trimming operating budgets.

Ross said he believes that there will ultimately be a legislative resolution to the issue of insurance coverage for terrorist risks.

But in the meantime, he said, "Financing for new development will be impacted as lenders wait to see when terrorism coverage will be available from insurers."

However, Ross does not expect institutional players to overreact to the insurance shortage "because they understand this level of risk and continue to have confidence in real estate as a financial instrument."

Ross predicted more alliances and partnerships of real estate services firms, security agencies, architects and engineers will 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, the added costs might filter down to building owners via higher property taxes or special assessments, Ross said.