“E |
merging Trends this year is relatively positive,” said Marshall Woodward, head or real estate operations for Lend Lease, at the Atlanta revealing of the 23rd annual Emerging Trends in Real Estate 2002 report. “I have to underscore the word relatively, though. The real estate industry does have its challenges here in Atlanta and across the country, but this time around we seem to be in a little bit better position to weather the storm.”
Emerging Trends is published by Lend Lease and PricewaterhouseCoopers. It is based on 150 interviews conducted by the partners. This year’s report set up the 2002 forecast by describing last year’s market.
2001 showed a two-stage decline in demand. First came the tech wreck followed by the tech wreck contagion — all amplified by the Sept. 11 attacks. “Corporations are continuing to save on the expense side,” reported Peter Korpacz, head of PricewaterhouseCoopers’ global real estate research group and leading appraiser and publisher of the well-known Korpacz Report. “This impacts real estate because there is less space leased.”
This time around, however, real estate investors are not leading the recession. “We are a bystander, and we’re going into it in a lot stronger condition than we did in the last recession,” explained Korpacz. The downward trend has been cushioned by several factors. One reason is that the markets have been in equilibrium, with supply under relative control. So there is not a lot of oversupply, “except from the technology industries,” Korpacz said. “But we call that an underleased market, rather than oversupplied.” Lease structures have also provided some protection, and low interest rates have helped protect the value of properties.
What Will 2002 Bring?
Respondents to the Lend Lease/PWC’s survey show that 2002 is full of uncertainty –“uncertainty in the world, in our country and in our real estate markets,” Korpacz noted. Much of the uncertainty is due to the recession, and “all of this has been heightened by the Sept. 11 terrorist attacks to a very large degree.”
With growth prospects retreating, 2002 is shaping up as a critical year for real estate as an asset class. “Investors are wondering: Are we going to be legit or not, are we mainstream enough, do we have credibility? A lot of this will depend on how real estate performs in 2002,” Korpacz said.
Though the economy will determine the depth and breadth of the real estate recession Emerging Trends respondents say that the real estate markets will dip. Signs of recovery, however, are expected to appear during the second half of 2002, with marked improvement into 2003. Core real estate returns for 2002 are expected to range between 7 percent and 9 percent.
Debt investors appear to be buffered from the downturn, but 2002 will present the CMBS market with its first down market. On the equity side, 2002 will be an important year as well. Pension funds are taking a wait-and-see approach, with some considering paring back portfolios. Ted Klinck, head of Lend Lease’s Southern U.S. Region, said, “The downside to all of this is that if returns tank next year, will pension funds be turned off to real estate altogether?” Real estate investment funds, he added, will have a bumpy ride in 2002, and many may see a number of secondary offerings.
Investors’ Best Bets
With all this uncertainty, investors wonder what are their best bets for returns. As has been the case for several years now, 24-hour cities dominate Emerging Trends “Consensus Six” (see chart). The Consensus Six are the six markets chosen by respondents as places where investors want to own or finance because of perceived potential for better risk-adjusted returns.
However, there is a rising risk of investing in 24-hour cities. Reasons for this risk include a souring economy, federal indifference to urban centers, the public school debacle, housing shortages and the fear factor. Still, they are expected to outperform the “next best” markets of Seattle, Miami, Philadelphia, Minneapolis and Denver. And the recent “Hot Towns,” including Houston, Phoenix, Dallas and Atlanta, will cool down considerably in 2002.
In conclusion, Korpacz reported, “The first part of 2002 will be a low point in a sudden real estate correction. But it’s not completely negative with the recession easing up in the second half. There will be some risks; so there certainly will be no boom, but don’t expect a bust either.”
