What can the real estate industry expect in the next few years? What challenges will we face? What opportunities can we use? The real estate industry will continue to enjoy success if it focuses on five critical areas when addressing future trends: finance, people, technology, strategies and process.

However, history tells us that we cannot ride today's real estate crest forever. Sooner or later, a downturn will impact the industry. Fortunately, this eventual slump will not be as severe as the recession of the late-1980s and early-1990s. With today's stricter loan underwriting standards, access to capital is not as free-flowing as it once was. So, developers haven't overbuilt every market in the country.

In the next economic downturn, investors will look to real estate, especially REITs, for stable returns. Real estate provides an income stream.

Capital availability and sources The 1998 capital scare was not, in reality, a terribly significant event. The very favorable debt market simply returned to historical levels. Yes, public money dried up, but private money has started to take its place because the basic underlying economics of the industry are favorable. Thus, money is available, but not at the low interest rates of late-1996 and early-1997.

What is significant, and what will impact the industry, is the change in real estate ownership - the "corporatization" of the industry - which ties real estate investment to the capital markets. Real estate now competes with everyone else in the capital markets. Whenever there is a downturn in the capital markets - which is inevitable - the real estate industry will be affected similarly.

Where will real estate capital come from in the near future? Private equity could decline, because some returns have not matched expectations. If that happens, two potential sources of capital are direct pension fund investment and a return to securitization.

International investment With most markets maturing in the United States, real estate investors are looking to Western Europe for opportunities, such as secondary and tertiary markets that have not been picked over. Investors willing to take greater risks in return for potential greater rewards are examining Central European countries which have adopted capitalism such as Poland, Hungary, and Czech Republic.

Finally, Japan, Korea, and many Southeast Asian nations have moved a long way in resolving their portfolios of troubled real estate and their banking crises. If investors can navigate the often-complex legal issues in these countries, they can find exciting properties in these recovering markets.

Tenants first If you build it, the tenants will no longer automatically come. It is no longer enough to provide a box with a mechanical system and some technology. Developers and investors must be acutely aware of the megatrends that are affecting their existing and potential clients' businesses, they must understand how their clients work, and then they must provide the building and services that meet their clients' needs and help them to compete in the global economy.

Putting tenants first also means commercial builders will have different partners in the future to better serve clients, such as energy- and environmentally-conscious partners, and high-tech and Information Technology partners.

The owner must also manage that project, insuring that it continues to provide the services its clients need, upgrading the building when necessary and adding amenities to meet changing needs. The owners must be aware of the total infrastructure needs, not only of their tenants, but also their employees and suppliers.

Changing real estate markets It is no longer business as usual for the real estate industry. Technology, the global economy, new industries, and population growth are all changing the country's real estate markets. For example, high-tech companies are moving some operations from high-cost Silicon Valley to lower-cost regions with good infrastructure and educated workforces, such as the Dulles corridor in Northern Virginia.

In addition, business technology has become so advanced that the historical need for physical proximity is gone. Global boundaries are evaporating when a company selects the location for a new call center or factory.

So, real estate companies need to think globally. If a U.S. client wants to put a factory in Poland or a call center in Australia, and a U.S. real estate company understands those markets and those governments, that company can acquire a new and valuable client.

The significant consolidation of REITs will continue over the next five to ten years. REITs will be taking advantage of the opportunity to generate fee income from non-real-estate services. An apartment REIT, for example, would look for other services and products that it could sell its current tenants. An office building REIT could offer a new executive suites program.

Unlocking value In the next few years, real estate will offer opportunities for owners and investors who find new ways to create value or to unlock value in dormant assets. Brownfield redevelopment, for example, is an existing problem looking for a creative answer that could reap strong returns for the shrewd investor.

Looking ahead In the coming years, owners and investors must utilize their real estate assets in a more efficient manner, so they can create the greatest value. Some will unlock trapped capital by the use of innovative off-balance sheet financing. All owners and investors must address the human side of the equation, such as change management issues relating to the movement from office to virtual space. Above all, they must regard real estate as a vital component of the entire strategic process.