LOS ANGELES -- To find new opportunities in 2003, developers will have to look beyond mainstream office, industrial, retail and hotel development to markets with long-term growth potential. “It won’t be business as usual for developers next year,” said Stan Ross, Chairman of the Board of the USC Lusk Center for Real Estate (www.usc.edu/lusk). “A slow-growing economy, global uncertainty, a weak job market and corporate cost cutting all point to a year of little or no growth in traditional real estate markets,” he said. “Developers will face intense competition and limited prospects in these markets.”
But the opportunities are out there. “Developers and investors will have to cast a wider net and be creative in planning and developing projects,” Ross noted. Among the opportunities:
· Public/private partnerships of developers and local, state and federal agencies in development and rehabilitation of civic centers, administrative buildings, libraries, airports, stadiums and arenas, convention centers, cultural centers, jails and prisons. “Governments have a pressing need for a range of new facilities, but they face large budget deficits,” Ross noted. “Developers who can help them to attract private investment capital will have an edge in winning business,” Ross commented.
· Development, remodeling and expansion of educational institutions from primary and secondary schools to colleges and universities. “Construction of educational facilities has lagged demand, and now schools and colleges are playing catch up,” Ross observed. “In addition, the U.S. birth rate is at its highest level in 30 years, and another wave of children will be moving through the educational system over the next 20 years.”
· Development of retirement housing, vacation homes, and senior living and healthcare facilities for an increasing number of aging baby boomers. As the nation’s 83 million baby boomers (ages 38-56) grow older, the greatest population increase over the next 15-20 years will be in the 50-65 and over 65 age groups. More seniors will take advantage of high housing prices to sell their homes and acquire smaller homes or condominiums or rent apartments.
· Development, renovation and expansion of hospitals and healthcare facilities to meet demand from a growing and aging population. In California, hospitals are being upgraded to meet tougher seismic standards or replaced with new facilities.
· Joint ventures with railroads to develop or redevelop unused or underutilized properties and acquisitions of surplus assets from railroads. Ross noted that some of the nation’s leading real estate developers built their empires by acquiring and developing former railroad properties.
· Development and sale of office and other facilities for a growing number of immigrant-owned businesses. “In the 1990s, the immigrant population grew at the fastest rate in a century,” Ross noted. “While that record rate of growth is not likely to continue, immigration will remain a driving force in the economy and real estate markets.”
· Providing outsourcing services to corporations that are transferring more and more of their real estate functions including asset management, project management and facilities management to third-party providers. “Companies will continue to focus on maximizing real estate values by disposing of surplus assets, managing space more efficiently, reducing occupancy costs, and outsourcing,” Ross commented. “Developers can apply their knowledge, experience and expertise in acting as outside real estate departments to companies,” he said.
“While there may not be much of a pickup in development in 2003, investment activity will remain strong,” Ross said. “Despite weak property markets, real estate continues to be an asset of choice for investors,” he noted. “It offers attractive yields, long-term cash flow, and stable investments – developers and lenders are more disciplined about starting projects, and the risks of overbuilding are much lower than in the past.” But investors will have to be selective, Ross warned. “Some metropolitan areas have started to recover, showing positive absorption and stabilizing rents,” he said. “Other areas still have a considerable amount of supply to digest way beyond next year.” Among product types, “apartment demand is starting to stir again, thanks to a pickup in household formations this year and house price escalation,” Ross said.
Ross said some of the best investment opportunities will be found in acquisitions of office buildings and other corporate assets. “Companies have an estimated $60 billion in synthetic leases on their books,” he observed. “To avoid moving the underlying assets back on their balance sheets under new accounting rules, many companies will dispose of these assets through sales or sale/leasebacks,” he said. In addition, continuing consolidation in corporate America could put more corporate real estate assets on the market.
Ross advised developers to closely track demographic and population trends to anticipate future growth in commercial property markets and new business opportunities. "Developers will need better forecasting tools, new business models, and creative strategies to keep growing in an increasingly competitive marketplace,” Ross said.