ERE Yarmouth gives NREI readers a first peek at its soon-to-be-released real estate report.

The nation's property markets are at their healthiest in the past 15 years.

The public markets -- REITs and CMBS -- are transforming the industry -- but it remains to be seen whether they can discipline capital flows and development activity enough to reduce the chances of significant softening in the property sectors.

The specter of new development hangs over the industry -- and will determine how long the current up cycle lasts.

These are just three of the main points of Emerging Trends in Real Estate: 1998, the latest edition of the study published annually by ERE Yarmouth and Real Estate Research Corp. This edition marks the 19th year for Emerging Trends, which has established itself as one of the real estate industry's most predictive reports. The basis for the report are the more than 150 proprietary interviews with real estate industry leaders conducted by RERC. These front-line insights are analyzed together with RERC's and ERE Yarmouth's investment research, giving an impressive overview of the dynamics of the current market.

"It's a heady time for U.S. real estate investors, as 1998 promises another stretch of excellent returns in both the private and public markets," says Matthew Banks, chief executive officer of ERE Yarmouth.

According to the report, the nation's property markets, except for retail and maybe apartments, and the underlying economy are almost too good to be true -- better, certainly, than at any time in the last 15 years. And 1998 looks like a slam-dunk for real estate investors, even as a new development wave takes hold. Conservatively, most markets can look at another two years of solid low-double-digit performance in a cyclical growth phase before the construction pipeline threatens supply/demand equilibrium.

But there's anxiety, albeit healthy, underneath that heady outlook. The speedy progress of the real estate cycle -- from utter debacle just four years ago to grand slams today, at least in suburban office development -- unsettles some investors. Early -'90s gridlock has been replaced by a flood of capital not only from Wall Street, but also from traditional institutional sources, who are all back in the game. "Believe it or not there's more money out there searching for deals than at the peak of the '80s market," said an acquisitions veteran. "Capital fuels excess. There's so much competition to make deals that bids are above asking prices."

The public markets' advance into real estate -- through REIT vehicles and commercial mortgage-backed securities (CMBS)--has turned the industry on its head. In this "sea change" the players are no longer asset accumulators in a relationship-based private business. They've become active traders in a transforming market that offers an array of new and different investment options, not to mention real-time information to facilitate decision-making. The focus has tightened even more on performance and how to improve it. Brokers, advisers and managers consolidate to achieve greater efficiencies and economy-of-scale advantages in a historically inefficient business, while Wall Street tries to squeeze out every extra penny of quarterly profit and institutional investors pinch fees.

Everyone, meanwhile, is scrutinizing portentous development trends. "1998 will be the key year for assessing market discipline in this cycle," predicts a REIT analyst. "If the apartment and industrial markets hold together, and construction pulls back, then we know public market discipline is keeping capital flows under relative control. If these markets soften dramatically and the projects continue, there could be trouble down the road now that suburban office development is ramped up."

Despite concerns about the capital torrent, dislocation from the ongoing industry makeover, and a new flock of building cranes, 1998 looks like a great year for real estate investors. 1999 should be solid too. Several echoed the view that "everything will be fine in '99." In fact, most indicators suggest the markets could hold up for another three to five years of good returns, altogether avoiding another secular bust.

More endorsements for Emerging Trends' 24-hour market model come from interviewee rankings of the major real estate metropolitan areas. The top six metro markets -- led again by San Francisco, Seattle and Boston--are all 24-hour powerhouses combining strong residential fundamentals in their urban cores with multidimensional environments, convenient retailing, relative safety and mass-transportation alternatives to the car. New York vaults from 12th place last year to fifth just behind Chicago. San Diego and Los Angeles follow, underscoring Southern California's strong economic recovery.

Major American cities in general are enjoying a renaissance of sorts. "Every city looks so good right now -- even Cleveland. Remember how bad Cleveland was?" The strong national economy has helped to swell municipal tax rolls, cut or eliminate operating deficits and provide breathing room for local governments to improve services. Crime is way down in many downtowns. And increasingly, cities are providing what many suburbs are struggling to retain -- a convenient and appealing lifestyle.

The now well-accepted Emerging Trends 24-hour market concept doesn't just consider growth trends and analyze black-box portfolio data. It makes livability the litmus test for determining the strength of real estate investment markets -- both suburban and urban. And it considers factors that lead to stable, more predictable markets in the context of lifestyle, behavioral and demographic shifts. Simply, if people want to live in a place, companies, stores, hotels and apartments will follow -- and should prosper.

The report clearly favors growth-restricted markets, places like Boston and San Francisco. Such markets have the formidable combination of being surrounded by water, a natural barrier to too much development, and a local political mindset that doesn't give developers free rein to build anything. Ever-expanding sunbelt suburban agglomerations -- places like Dallas and Atlanta - should give investors pause. What is the lasting value of any piece of real estate if a competing developer can build a newer, shinier version just down the road, unimpeded by nature or man?

Here is the "Cities To Watch" List, in order of ranking: San Francisco Buildings in this market are bought "like impressionist paintings." Investors want them in their portfolios, so price is almost no object. But at this point what about returns? The office markets -- downtown and suburban -- are "white hot." Rents go up at a 1% plus monthly clip. Land constraints and regulation make it difficult to develop in downtown; completion of any new construction is at least two years away and will be limited. Suburban counties don't make development easy either.

Seattle A.k.a. San Francisco junior. Water and mountains limit development and control supply. Overbuilding risk is relatively low, and any office construction is about a year away. There's still an opportunity to buy below replacement cost, but the window will close during 1998.

Boston Over the past four years this mature 24-hour city has "taken off like a rocket ship." Vacancies are single-digit and rents are spiraling, with room to grow -- they're still generally below '80s' peaks. Financial, healthcare and technology companies provide the economic foundation. It's the top East Coast market for job growth, but a Wall Street correction could slow things down.

Chicago Investors like this city's "durability." "It will never get hurt too badly." A "capital-driven feeding frenzy" has pushed some suburban office properties over replacement cost hurdles, and discounts for downtown Class-A space are rapidly diminishing. For leftover opportunity investors, better spreads exist on downtown Class-B office.

New York Captures its highest ranking since mid 1980s. The Apple is ripe. Virtually no large blocks of contiguous Class-A space remain in Midtown. Vacancies plunge into single digits. Even downtown improves as office-to-apartment conversions lease up, although office vacancies are still in the high teens.

Washington, D.C. Mayor Barry might not agree, but the District is "getting its act together" as the Congressionally enacted Financial Control Board takes effective control of running local government. Testifying to the market's inherent strength, Class-A space is hard to find; most of the 10% plus vacancy is in -B and -C product.

San Diego Growth in high-tech and biomedical industries converts this one-time Navy base town into a solid real estate market, especially in the northern suburbs. Typifying the suburban agglomeration phenomenon, downtown office is weak -- nobody lives there. But to the north, alluring residential communities -- La Jolla, Carlsbad and Rancho Bernardo -- "are on fire" with computer and biotech firm expansions.

Los Angeles The "Southland" has become a patchwork of submarkets stretching up the coast from south of Orange County, through Long Beach, the CBD and West Los Angeles then extending to Glendale, Burbank and the San Fernando Valley north of the Hollywood Hills. To the east the expanse reaches out past Pasadena to Ontario. It's the ultimate in suburban agglomerations. Only the Pacific Ocean and desert hold it back. Investor demand is strong across the board.

Minneapolis Strongest top-to-bottom metropolitan area in the Midwest, though Chicago's depth forces second-fiddle status. Investors like its relative stability and perceived socioeconomic condition (not a lot of poor people). This market attained full recovery in 1996 and is peaking now. Suburban and downtown office are pricey -- business parks are a lower-cost alternative. Development is under way, and suburban office could face some excess supply.

Miami Ironically, this South Florida mecca has become the business capital for Latin America, while European vacationers continue to flock to its beaches. It's truly a global center. Strict land management -- concerns about water supply and the Everglades -- will restrict future growth. Land is a great investment opportunity. The office markets have ample room for rent upticks and upside to replacement cost. CBD/Brickell office development will occur before 2000 after a 10-year-plus lull.

Denver This market is past peak, dropping out of the top 10 after a fifth-place ranking last year. New construction has occurred in all property categories. A building binge softened the apartment market, but developers are wisely backing off. The population surge from California has dried up as L.A. recovers.

Dallas The Metroplex's drop in the rankings doesn't reflect a lack of investment opportunities or its "red hot" growth (top 10 U.S. markets in new jobs). Interviewees are concerned about overbuilding risk. But suburban office can still be bought for well below replacement cost--up to 30%. Some office construction will start soon, but spec development is limited. "We're two to three years behind Atlanta."

Houston After a 15-year hiatus precipitated by a massive building boom and bust, investors are suddenly rediscovering this expansive suburban market. They've burned through much of the rest of the country; now it's Houston's turn. Some contrarians hope for a cataclysmic event to send oil prices skyrocketing and set the city's corporate engine -- the big energy and oil companies -- into gear.

Phoenix Another case of Sunbelt sprawl. It's time for another chill pill. The area's employment growth is second only to Las Vegas', but it all seems to spread out into the desert. Scottsdale and the Camelback corridor -- near the prime residential districts -- are the best office markets. "After that you need to be careful." Cranes are plentiful.

Atlanta For 1998, this Southeast metropolis may be the riskiest real estate market in our survey. Drops to 15th place for investment prospects, from first only two years ago. Atlanta epitomizes many of the things going wrong in suburban agglomerations -- "outrageous" traffic congestion, poor regional planning and a disappearing core and too much development too soon.

Philadelphia Downtown is bouncing back slowly from its case of 9-to-5 syndrome, which is mostly crime related. Most of the action is in the healthy suburban markets west of the city in the Route 202 corridor. Vacancies are single-digit and spec construction will begin in 1998.

Apartments are too expensive and power centers face a category-killer shakeout soon. Regional malls do relatively well here. The two-year-old convention center has been a boon, and Center City needs new hotels.

St. Louis CBD's 9-to-5 sickness drags down the entire market. Outmigration of tenants continues to Clayton and other suburban districts where single-digit vacancies are spiking rents. Warehouses are excellent buys. You can hit some singles and doubles here. But home runs are tough to come by.

Copies of Emerging Trends are available at $25 each from Real Estate Research Corp., 2 North LaSalle St., Suite 730, Chicago, IL 60602 or ERE Yarmouth, 10 E. 50th St., 20th Floor, New York, NY 10022.