WASHINGTON, D.C. — It is one of the best of times for tenants; it is not for many other U.S. real estate players.
        That, with apologies to Charles Dickens, is one major drift in the Urban Land Institute's (ULI at www.uli.org) mid-year Real Estate Forecast.
        "Negative job growth and a rising unemployment rate have greatly undermined both consumer confidence and the demand for real estate, especially office space, but industrial, retail, hotel and apartment properties as well," the forecast said of the U.S. market.
        But then there's the other, decidedly different side of the market equation, which echoes something that Salman Rushdie once wrote: "Reality is a question of perspective."
        In other words, the impact of the current market depends on which side of the industry fence one is sitting. Just how much of a difference perspective can make was boldfaced in a recent Colliers International (www.colliers.com) U.S. office market survey. Colliers, in fact, opined that the current market has created precisely the right time for tenants to make deals for space.
        "Tenants are back in the driver's seat, often with an overwhelming number of options," the Colliers survey report said. "With tenants increasingly trying to time the market, many feel now is the time to renegotiate leases, even with [expirations] more than two years off. Current leasing activity is characterized by lease terminations and not growth."

Service Providers Will Score
'Strongest Profits,' Forecast Predicts

ULI's survey similarly limns the state of the U.S. office market - only from the perspective of those investing in or supplying such space. "The office sector saw a dramatic reversal of fortune in 2001, and its prospects for the coming year are generally poor," the forecast notes. The ULI report, however, isn't a doom-and-gloom job. The U.S. economy, it noted, "appears to recovering from the mild recession."
        The report added, however, that real estate's performance is likely to lag behind the larger economy. As a result, the forecast notes, "Most sectors of real estate will continue to feel the pinch for the next 12 months."
        Even so, 49 percent of the respondents to ULI's member survey expect real estate firms' profitability to be "good to excellent" through mid-2003. That figure, however, is some 18 percent lower than the 60 percent of real estate firms that expected "good to excellent" years in ULI's 2001 mid-year survey.
        Real estate services providers will top the major industry sectors in recording the "strongest profits" over the near term, according to ULI's forecast. Following in near-term profitability, the report predicted, will be, respectively, financial services/institutional investors; residential or resort developers; private real estate operating firms and developers; public real estate operating companies; and, lastly, real estate investment trusts.

New York (pictured) was voted the No. 2 "most favored" investment market. "The loss of the World Trade Center has taken a lot of space out of the market and kept the market from deteriorating. . . . Infusion of state and federal funds to revitalize lower Manhattan will also help," ULI's reported noted.

Washington, New York Voted
'Most Favored' Investment Markets

Overall market conditions notwithstanding, hot spots remain for U.S. real estate investment, ULI reported. Survey participants' top five "most favored" investment markets included:
        1. Washington, D.C.: "Strong because of the tight market that predated the recession and the fact that demand remains strong in many sectors of the local economy, particularly government and defense contracting," the forecast commented.
        2. New York: "The loss of the World Trade Center has taken a lot of space out of the market and kept the market from deteriorating. . . . Infusion of state and federal funds to revitalize lower Manhattan will also help."
        3. Los Angeles: "Will lead because of its diversified economy - not heavily dependent on technology sectors - and its strong population growth."
        4. Chicago: "Will benefit from its broadly diversified economy and from recovery in the manufacturing sector."
        5. San Diego: "Will get a boost from increased defense spending." But the degree of difficulty for real estate development has appreciably increased, ULI reported.
        "Attractive development opportunities will be hard to find and difficult to finance," the forecast noted. "Housing in general" offers the "strongest development prospects," it added, with the greatest housing potential in master-planned communities, middle-income detached housing and in-fill housing.

'Only Fair Prospects' for Rent Hikes

ULI's rental-rate forecast underscores the strong bargaining hand that corporate end users now hold. "The prospects for attractive rent increases for most commercial properties are fair to poor over the coming year," the report noted.
        Low- and middle-income multifamily rental properties were forecast as "the top performers in terms of rent increases over the next 12 months, followed by neighborhood/community shopping centers and warehouse industrial properties." Even so, the top-ranked rental-growth sectors will "see only fair prospects for increases," the forecast predicted.
        The "poorest prospects" for rental hikes, ULI's report predicted, will be luxury hotels, high-rise suburban office properties, resort hotels and downtown office space.
        Industrial properties are one corporate-space market sector that will rebound fairly quickly, the report predicted. The industrial market "will continue to soften through 2002 and then stabilize in 2003," with "considerable improvement" the first half of 2003, ULI forecast. Prudence, ULI's report suggests, will be a near-term watchword for many industry players. The current market, for example, won't likely smile on the knee-jerk, build-it-and-they-will-come strategy that seems ingrained in parts of the industry, the forecast indicated.
        "This is a market dominated by players with a great deal of capital, short memories, long on hope, and with a strong belief that 'this time it is different' - the five most dangerous words in the English language," said Stanley Iezman, president and chief executive officer of Glendale, Calif.-based American Realty Advisors, one of the ULI members who provided comments for the report.
        The industry's leaders, however, are likely to intelligently evolve and, eventually, flourish in the current environment, commented Anthony Trella, president and CEO of Deerfield Beach, Fla.-based Meranth Co.
        "As usual, those lacking vision and courage talk in yesterday's terms, while tomorrow's leaders see a new and better future, albeit a future different from yesterday," Trella said.