Week of December 11, 2000
  Snapshot from the Field

U.S. Real Estate Industry Strongly Positioned
to Weather Slowdown, Economists Tell ULI

By JACK LYNESite Selection Executive Editor of Interactive Publishing

Despite pockets of sluggishness, the U.S. real estate industry overall is in good shape to weather an economic slowdown.

That was the common note sounded by two high-profile real estate gurus who spoke at November's annual fall meeting of the Urban Land Institute (ULI www.uli.org) in Chicago.

And with signs of an economic slowdown now peeping over the horizon, those prognostications may soon be put to the test.

Kenneth RosenRosen: Conservative Lending Fends off
'Build-It-and-They-Will-Come' Syndrome

"Real estate is the best performer of the economy today. Some areas are still in a growth cycle, and most sectors are solid," said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley's Haas School of Business (www.haas.berkeley.edu).

Conservative lending by banks has kept commercial- and residential-sector construction balanced, which has held off overbuilding, Rosen noted.

"Real estate is the best performer of the economy today," said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley's Haas School of Business.

"While we hope for a soft landing for the economy, real estate will be able to sustain even a hard landing. There is no chance of repeating a downward cycle within the next two years," Rosen said.

Continued strong job growth is fueling U.S. office-space demand, keeping vacancy rates low and rents up, Rosen noted.

Multifamily-sector construction has kept pace with demand in most areas (California, Rosen noted, being an exception), and vacancy rates are down. Rental demand can be expected to increase, said Rosen, with a large segment of the population turning 18 by 2010.

Retail's Death Greatly Exaggerated,
But Overbuilding Plagues Sector

Despite some analysts' predictions of stiff online competition, the retail sector remains healthy, Rosen noted.

He maintained, however, that there is too much new construction in the overall retail industry. Many retailers are continuing to over-expand their space and are overestimating consumer spending, he said.

Many of the healthiest real estate markets in terms of economic growth are clustered on the East and West Coasts, Rosen noted. The top 10 cities for employment growth, he said, are Los Angeles; Dallas; Atlanta; Washington, D.C.; Phoenix; San Francisco; Houston; New York; Tampa and Orlando, respectively.

Peter LinnemanLinneman: 1980s' Excesses
Helped Blunt Overbuilding

In contrast to Rosen, Peter Linneman asserted that the rampant overbuilding of the 1980s has been the key in blunting office overbuilding.

The addition of more than 1 million U.S. private-sector workers a year has created a "powerful engine" for filling office space, noted Linneman, Albert Sussman professor of real estate at the University of Pennsylvania's Wharton School (www.wharton.upenn.edu). While office construction has increased to accommodate that growth, the building "has not even come close" to the outstripping of demand registered in the 1980s, he added. In fact, the overbuilt office space from the 1980s has meant that less new space has been needed to keep pace with U.S. economic growth sustained over the past 15 years, Linneman explained.

The rampant overbuilding of the 1980s has blunted office overbuilding during 15 years of sustained U.S. economic growth, contended the Wharton School's Peter Linneman.

Linneman, however, did identify one ticking time bomb if the U.S. economy suffers a hard landing - consumer debt. With historically low U.S. unemployment, consumers have gone on a spending surge, he explained. Particularly vulnerable are those with little home equity and large portfolios of high-tech stocks, Linneman said.

Zurich Financial Services' Hale:
'Slight Decline' Is Worst-Case Scenario

Underlying those real estate analyses was the question of whether a U.S. economic nosedive is waiting in the wings.

"A slight decline" over the next year is the worst that will befall the U.S. economy, David Hale, Zurich Financial Services Group's chief global economist, told ULI's Chicago gathering. The American economy, he said, has been buoyed by a combination of explosive growth in technology, huge amounts of venture capital and the ability to attract large numbers of highly skilled immigrant workers.

But Hale contended that the U.S. economy will remain healthy even if venture funds taper off - which is just what's happening in the dot.bomb aftermath.

"The entrepreneurial businesses funded by venture capital have had a positive impact on economic growth," said Hale. "There is no doubt that the flow of venture capital will slow, but even as it reaches a more stable point, it will continue to serve as a large funding source to create new growth opportunities."


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