ULI launches study, recovery continues

Cleveland - If real estate is truly a local business, then most national surveys of property trends are too general and meaningless, right? Perhaps that's not the case with a new report just released by the Urban Land Institute (ULI) at its annual spring meeting, held here earlier this year.

The ULI 1996 Real Estate Market Forecast: Outlook by Sector, Area and Enterprise is the first of its kind research study undertaken by the ULI. Its findings, presented by Leanne Lachman, ULI vice president, chair of the ULI research committee and managing director of Schroder Real Estate Associates, speak to the recognizable general recovery of most major real estate markets, but it begs the question,Has the recovery played out?"

Drawing on data collected at year-end 1995 from the local ULI Market Profiles (which cover 52 markets) and surveys of more than 600 ULI Council members conducted in December 1996 and January 1996, the report gives a broad-based consensus on the state of the industry.

"Most property types and most metropolitan markets will continue to improve," said Lachman. The degree of last year's recovery may be greater than this year's, but we're still moving up."

Suburban office, industrial and hotels top the ULI property performance forecast, while the bottom end is anchored two retail entities - strip shopping centers and regional

Six of the most important overall trends identified report include:

l. Overall global improvement 2. Lower vacancies, higher rents in all major markets. 3. Suburbs and exurbs lead the real estate recovery. 4. Construction and land costs are increasing. 5. Capital is available. 6. Overbuilding is still a threat.

"If Alan Greenspan has truly engineered a soft landing that will allow growth to strengthen this year after several slow quarters, then most real estate sectors and markets will likely continue on an upward path as well, even those that now look as though they have passed their peaks in terms of performance growth rates," say the report authors.

On the financial front, the REIT industry and securitization are having an enormous impact on the industry. As for the notion of consolidation in the REIT industry, the report is clear. "The extremely rapid expansion of the REIT industry and the fact that many owners were driven to REITs out of desperation rather than choice means that the industry is probably going to experience some shakeouts and settling over the next few years." Still, REIT returns are expected to continue strengthening this year and over the next five years.

In general, the financing environment will continue to improve with modest increases in the availability of capital, but with it might come a loosening of stringent loan terms. The results indicate a small shift in the allocation of capital toward financing new speculative development, a prospect that worries some in the industry. The levels of exchange are expected to be extremely small, however, and should not have a major impact on speculative construction activity in the short run," say the report authors.

Also, "The available financing choices and the competition among alternative providers of funds has ever been greater for real estate operators and developers. The development of the public equity and debt markets over the last 10 years has greatly increased the options for both investing in real estate and financing real estate construction, acquisition and operation."

Interestingly, apartments may be a key leading indicator for the health of the industry. "The rental apartment sector may be the bellwether that indicates whether the real estate industry can modify its development activity in a timely manner to allow rents to maintain reasonable growth rates or whether supply will again overtake demand and cause rents to stagnate or even decline."

In the end, the report's last words are telling. "While pundits have been predicting that `Things will be fine until 1999,'we prefer something along the lines of `It will feel like heaven through 1997,' for lack of a better rhyme," say the report authors.

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