Ripple effects from the aptly-titled “Goldilocks” economy (meaning not-so-hot, not-so-cold) are fueling a widespread fundamentals recovery in the real estate sector. It’s all but definite by now that every asset class is showing signs of improvement, though the race is staggered.

Retail is the frontrunner, reports ING Real Estate, and it should hold onto its lead in terms of leasing growth. Warehouses and offices should also perform well over the next 12 to 18 months, reports ING, while the apartment market will continue to bring up the rear.

“We believe the economy is entering a period of sustainable, moderate growth similar to what was experienced in the 1990s. While a pick-up in inflation and the current account and federal deficits remain concerns, in our view conditions remain broadly favorable to real estate as an asset class,” says Dr. Will McIntosh, ING Real Estate’s head of global research.

McIntosh notes that both the public and private real estate markets pulled off stellar performances in 2004 as evidenced by the weight of capital that flooded each sector. He believes that the thick flow of capital isn’t about to run dry in 2005, and returns should remain competitive relative to other, non-real estate asset classes.

Retail should continue to be the top performer, though returns may not rise as high as 23%, where they were in 2003. One major factor—real growth in disposable household income—will continue to drive the market.

As for the hotel sector, the real turnaround began in 2004. ING expects further growth in lodging demand through the end of this year, with “peak profitability” arriving by 2006-2007.

On the industrial side, warehouse demand should increase this year—building on strong returns from 2004. The best performing markets will be scattered in and around the nation’s major transshipment hubs, which are benefiting from expanding global trade.

The office sector, meanwhile, will continue to recover in 2005. Some markets—namely Washington, D.C. and New York City—are already posting below average vacancy. The laggards over the past few years have been the suburban office markets, but ING believes that a suburban recovery is underway.

Last and perhaps least from an operational standpoint, the apartment market’s struggles will continue this year. Low mortgage rates, low labor force participation among the key renter age group (25 to 34 years old) and an agonizingly slow concession burn-off makes the apartment sector suspect in 2005. As a result, ING recommends a “cautious approach” to this sector over the next 12 to 18 months.

“While we expect to see performance differentials across property types and regions, we believe that real estate will generally continue to offer attractive investment potential in 2005,” adds McIntosh of ING.