PWC Report: Market Contraction Will 'Last through 2003'

Week of August 6, 2001
Snapshot from the Field

PWC Also Slashing Staff

PWC Report: Market Contraction Will
'Last through 2003'

By JACK LYNE
Site Selection Executive Editor of Interactive Publishing

NEW YORK -- A lot of bad news and a little good news: That's the U.S. real estate market outlook in PricewaterhouseCoopers' (PWC at www.pwcglobal.com) new "Real Estate Values" report.
The ample bad news: "The [market's] current contraction phase, characterized by increased vacancy rates, slowing rental growth and rising cap rates, will last through 2003," PWC's report projected. PWC's prediction for a 2004 turnaround differs significantly from most major outlooks released this year, which have predicted a second-half 2001 rebound.

The office sector in Minneapolis (pictured above) is one of markets
that will rebound most rapidly, according to PWC's report.

The report's good news: "For most markets," the contraction won't lead to the deep recession and rapid erosion of real estate values that pockmarked the early 1990s.
The early 1990s' contraction, PWC's report pointed out, was caused by the one-two punch of an economic recession on the heels of the massive overbuilding of the late 1980s. In contrast, the catalyst for current reduced demand is not oversupply, but "slower economic growth and an apparent restructuring of corporate America and U.S. households," PWC's report stated.
"We can look with perfect hindsight to the last real estate cycle downturn and identify the causes of the last contraction and subsequent recession," said Peter Korpacz, editor of the report and director in PricewaterhouseCoopers Financial Advisory Services' Global Strategic Real Estate Research Group. "The red flags aren't in abundance today as they were 10 to 12 years ago. There are not the same outward signals in today's real estate markets as found in the late 1980s and early 1990s."
By coincidence, the quarterly "Real Estate Values" report was released on the same day that news broke that PWC was implementing its third round of staff cuts since February. The New York-based global consulting giant is cutting as many as 750 jobs in North America and India by the end of October, according to Consulting Alert.
Here's a look at further details of both PWC's report and its cutbacks.

Office Vacancy Up to 9.5 Percent

"Office markets are moving into a contraction phase. National office vacancy rates have increased from 8.9 percent to 9.5 percent over the last year," the report concluded. Behind that contraction, though, is not oversupply, but "significant changes in office demand growth," the report noted.
Smarter work-space strategies are a major driver in the contraction, according to the report. The workplace management initiatives spearheaded by the International Development Research Council (IDRC) have helped create no-nonsense, anti-entitlement attitudes about space allocation.

Hartford, Conn. (pictured above), is one of office market that will
"dip into recession through 2005," according to the "Real Estate Values" report.

Said the "Real Estate Values" report, "There are two demand factors contributing to the movement of office markets into contraction: less existing space required per office employee and less new space needed for each office employee."
Some office markets will rebound more rapidly, the report noted: "Markets that will either experience a brief contraction before returning to expansion or experience stable and slow expansion through 2005" include Austin, Texas; Columbus, Ohio; Fort Lauderdale, Fla.; Las Vegas; and Minneapolis.
Markets projected as having "stable value prospects that will remain in a holding pattern through 2005" were Charlotte, N.C.; Cincinnati; Honolulu; Milwaukee; and Pittsburgh. Markets that will "continue in a contraction phase and dip into recession through 2005" included Hartford, Conn.; Miami, San Jose, Calif.; Tampa, Fla.; and Washington, D.C., said PWC's report.

Retail: 'Overwhelming' Contraction

In the retail sector, "the national market has overwhelmingly moved into contraction," the report noted. By yearend 2001, "75 percent of the nation's retail stock [will be] in the contraction phase . . . up from 47 percent in 2000," the report asserted. By 2003, more than 80 percent of the retail market will be in the contraction phase, "Real Estate Values" projected.
"[Retail] vacancy rates will steadily rise over the next five years," said the report. It noted, however, that retail vacancy rates "will remain well below those witnessed during the recession of the early 1990s," when retail vacancy peaked at 18.6 percent. By comparison, "Real Estate Values" projected 10.3 percent retail vacancy at yearend 2001.

Healthier Prospects for Multifamily, Warehouse

The multifamily and warehouse markets have healthier prospects, according to PWC's report.
"Multifamily demand will remain strong especially in the South and West regions, where rapid population growth is expected," it said. "Low vacancy rates and moderate rental growth will persist throughout much of the nation."
PWC's report cited "immigration demand, coupled with the growth in non-married households" as "driving forces" in the multifamily market's health. "The absolute necessity of having housing, a short construction cycle, improving information flow and close capital market scrutiny will ensure that new supply levels remain in check with changing demand."
Warehouse markets will rebound quickly, since that sector's cycles "are generally less volatile than the office cycles," "Real Estate Values" reported. "Regardless of the demise of many e-tailers, demand for durable and non-durable goods from households and firms are increasing, albeit at slower growth rates than in recent years."

PWC Cutting 5 Percent of Staff

Reduced demand is also behind the staff cuts among PWC's 31,000 consultants. That diminished demand, however, typifies the industry. PWC's major competitors, including Accenture, Cap Gemini Ernst & Young and KPMG, have all have made substantial personnel cuts.
PWC's latest staff cuts come after an estimated 1,000 consulting positions were eliminated in April. That move followed 400 PWC job cuts in February.
PricewaterhouseCoopers is also pushing back the employment start date for its new class of recruits until April 2002. PWC will cover starting bonuses and relocation expenses for any of the 650 college recruits who have already moved, according to Consulting Alert.
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