With plenty of capital infusing the real estate markets, 1998 will continue to be a year of optimism. To mark the release of its 16th annual Real Estate Market Forecast, Landauer Real Estate Counselors is holding a series of briefings in major cities across the country.
Recently, it was my pleasure to attend the briefing held in Atlanta to a crowd of some 200 of the market's most high-powered executives.
Each briefing is led by long-time Landauer researcher Hugh Kelly, who has become one of the most respected prognosticators in the business.
In this year's version, the 1998 Market Forecast, Kelly has rightfully segmented the forecast by property type and assigned a Market Quality Rating to every major city.
Also on view in Atlanta and at every forecast briefing, is Landauer's newest bit of online research technology, called the Landauer Metro Analyst. This interactive research tool provides information and analysis throughout the year, delivering quarterly Market Quality Ratings along with their supporting economic, demographic and statistical data, presented in both graphic and tabular formats. Accompanying the Market Quality Ratings is the Landauer Research Gazette, a series of incisive weekly textual commentaries. Anyone with Internet access may preview the Metro Analyst by logging on to the Landauer website (www.landauer.com).
Now let's walk through Landauer's executive summary.
The economy Not surprisingly, the 1990s economic recovery has been led by investment rather than consumption, as occurred in the 1980s. High-tech growth has fueled Seattle, Portland, San Jose and Phoenix, while finance and business services are giving a boost to New York, Los Angeles, Miami and Dallas. Direct property investment is robust, with the sheer volume of capital causing investors to look at larger properties, which is turning into goodfor the nation's downtown markets.
The future may indeed reveal that the 1990s may be known for the longest growth period in American economic history. And real estate is poised to see a significant new construction cycle in the 1998-2000 period. This means the industry's fortunes are based on the disciplined management of that cycle.
In sum, Landauer reaffirms its confidence that the upward cycle of real estate markets, both from a supply/demand perspective and from an investment pricing standpoint, has considerable room to run.
Office Market Supply/demand fundamentals and the availability of capital are in balance at present in most metropolitan markets, says Landauer. The firm noted single-digit vacancy rates in 22 of the 60 MSAs analyzed in the Market Quality Ratings and 28 of the 60 markets have strong Market Quality Ratings.
REITs were strong buyers of office properties in 1997, and should snap up even more in 1998, as should pension funds. Cap rates are now down to an average 9.3% according to the CCIM/Landauer $32.6 billion transaction database. Who's out in front? Phoenix repeats at the top spot on the Momentum Index, followed by the Western and Mountain markets. Also, Boston and New York City made major moves forward.
Retail Market Sales per square foot are on the rise in the retail sector, and investment capital is refocusing on shopping centers as returns become more attractive. The retailing environment will continue to be competitive for the foreseeable future, with industry segmentation that now rivals the hotel market. Still, with retail, Landauer cautions that it is wise to look to the past as well as to the future. Portland,and Pittsburgh are the top-rated retail markets.
Industrial Market The performance curve of warehouse/distribution facilities, which is the bellwether for the light industrial sector, appears to be flattening out while light assembly and R&D facilities are showing stronger supply/demand fundamentals. R&D is accelerating as Internet commerce expands. And of the top 10 warehouse markets, four are port cities keyed to international trade.
Residential Market For many years, multifamily properties have been the favorite of institutional investors, and they show no signs of yielding. The emphasis has shifted to large, higher quality properties. Occupancies are healthy, with the mean vacancy rate in Landauer's 58 metro areas at 5.1% for the past 12 months. Investment returns for the companion seniors housing market look excellent. San Diego and San Jose head the list of top-quality markets. Las Vegas experienced a dramatic drop from 29th to 12th place on the list, and Salt Lake City and Chicago saw declining occupancy levels. Overall, multifamily should maintain its high ground in 1998.
Hotel Market Without a doubt, the nation's hoteliers are battling for market share. This atmosphere creates a lively mergers and acquisitions environment. Surprisingly, technological advancements are outstripping even the capital market evolution as a change agent in the hotel field. While the majority of metro areas will see new hotels in the coming year, the net effect will be only marginal differences in room rates and occupancy levels in most places.
Conclusion Landauer's forecast points to markets that are very much internally disciplined, with lenders underwriting construction loans conservatively and developers providing only limited amounts of new construction. But will this change? Landauer is betting that it will, so stay tuned.