2000 & BEYOND: New century, new dynamics

Real estate investment and development will face numerous challenges and opportunities in the early-21st Century. Traditional market factors will continue to be in force, but new or perceived opportunities will also arise. Supply, demand and capital market dynamics may be redefined, and certain aspects of each of these factors should be evaluated now to assess actions for the years ahead. Several distinct observations may help illustrate these points.

On the supply side, the redeployment and redevelopment of urban commercial real estate will become more pronounced. The cost and availability of undeveloped land may preclude profitable development. However, new products may address the physical, functional and economic obsolescence in existing stock through conversion strategies. Aging or outmoded office space will continue to be redeveloped for residential or hospitality uses. Industrial properties may be transformed to retail, residential, entertainment or other uses. In some cities, even existing contaminated industrial areas are already being targeted as sites for uses such as solar energy sites or above-ground high-tech farming. Mainly, though, facilities will be redeveloped to not only meet the changing needs of real estate users, but also to take advantage of the infrastructure in place.

Major, well-planned cities will be the beneficiaries of such redeployment due to infrastructure and commensurate cost considerations. New York and Chicago are beginning this process, which could apply globally. Those metropolitan areas lacking adequate infrastructure and/or planning may require more drastic redevelopment to meet users' needs. This may include massive demolition and development. However, adaptive reuse of real estate product should be more pronounced, and will be a more significant contribution to real estate well into the next century. Lessons learned in U.S. redevelopment strategies may be applied throughout the world.

Americans healthier, wealthier The overall aging of the population is a major force that has been projected in the demand quotient for U.S. residential real estate - a fact of life that is mirrored, generally, around the globe. While this has been trumpeted as the harbinger for a boom in seniors living facilities, there may be some surprises as this market segment evolves. Interestingly, new information indicates that older Americans are healthier and wealthier, and are tending to stay in their homes and neighborhoods longer. This is consistent with human nature and the desire for independence while enjoying the bonds of the community. While seniors may need medical care, they can more readily afford in-home services.Creating supply for this demand coterie will require ever more rigorous local-market analysis.

Successful seniors housing product requires research, strategy and execution. Ongoing research will have to match current and expected supply with demand and anticipated changes in the local marketplace. The owner and developer's strategies will need to reconcile facilities, amenities and product with both the ability and the willingness of users to pay for the product and "program." Effective execution requires delivery of the real estate program demanded while providing an acceptable return on investment. Thus, real estate and operational expertise are conjunctive keys to success.

Capital markets volatile Real estate capital markets will continue to evolve, with mixed implications for developers, owners and capital sources. The public debt and equity markets will grow, but product pricing and structure should better reflect associated operational and related property risks. However, as the public markets become more global and risk becomes more difficult to quantify, capital markets can be subject to volatility. As such, market "efficiency" may be potentially more punishing to real estate transactions than basic, intrinsic supply, demand and other economic factors.

As the century closes, we are advancing on a record period of U.S. economic expansion, despite flat or recessionary conditions worldwide. A contraction in the U.S. economy or more negative global events may impact capital markets and invite additional consequences to the availability and pricing for public debt and equity of real estate.

Private real estate debt and equity should benefit from the growth of public markets, although private capital will remain the major financial force in real estate. Aberrations in the public markets create arbitrage opportunities for tactical private capital. In addition, private capital can exhibit more patience as the larger pools of real estate equity - pension funds - focus on meeting actuarial needs as opposed to profit and growth expectations demanded in the public markets. Accordingly, private debt and equity capital will be available to the real estate markets, incorporating the advantage of public-market information withreasonably well-defined risk-adjusted return expectations.

In summary, elements of supply and demand will evolve in the new millennium. However, new and/or counter intuitive strategies will be rewarded or punished by the market in accordance with how well they satisfy economic and demographic needs.

Capital markets will likewise transform to meet the needs of capital providers and users, while public market participation will reflect more efficient pricing and potential volatility. Private debt and equity will continue as dominant capital providers to real estate, benefiting from public market participation.

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