What's in the cards for 2001?

Industry experts, fortune teller say real estate is playing with a strong hand.

The year 2001 will be an excellent one for real estate. So says Mia Pontoon of New York City, who has some inside knowledge.

"Initially, the year may start off a little quiet, but a lot of people will be interested in real estate by February," she says. "I see a lot of positive things. March should be a peak month for real estate. July will be very good as well. And by October, real estate will peak again, and we will see a lot of money in the real estate industry."

How does Miss Pontoon know this? "It's in the cards," she says. Mia Pontoon, you see, is a Master Tarot Card reader and numerologist, acclaimed as one of the best in the Big Apple. Her clients include Wall Street deal makers, high-profile real estate developers and half the cast of the hit television show "Friends." The cards, she adds, don't lie.

While NREI's other experts typically don't consult Tarot cards, most agree with Miss Pontoon, saying 2001 will be a good year for real estate. If anything, industry experts say, the pace may seem a little slower because the tempo of real estate in 2000 has been so rapid.

"I'm optimistic about the future, both for the remainder of this year and for 2001," says Michael Giliberto, managing director and head of research for alternative investment strategies at J. P. Morgan Investment Management in New York. "It's remarkable how well-balanced supply and demand has been. Normally, in a period of expansion such as this, you see an imbalance."

Giliberto adds that one of the factors that's driving the real estate market this year, and is expected to continue to fuel the industry in 2001, is the unexpected strong growth of the United States economy. "Most prognosticators are repeatedly surprised on the upside," he adds. "There is strong demand, hence any potential for overbuilding is quickly taken care of."

Many others agree. One of the biggest uncertainties in 2001, from a retail real estate perspective, may be the economy, forecasters say. The Nasdaq and the New York Stock Exchange have experienced some volatility in recent months, oil prices have spiked sharply and consumer confidence in the economy may not be as high as it was 12 months ago.

Drew Alexander, president of Houston-based Weingarten Realty Investors, emphasizes that there are strong signs the economy will continue to expand - albeit at a slower pace - in 2001. Experts say the U. S. economy is growing nearly 3% a year, down from an estimated 5% annually. That slowdown could affect not only real estate development, but also retail sales.

"I wouldn't say the economy is going to turn, although there is some concern that it is slowing," says Alexander. "You could say the robust economy of this year could be less robust next year. Home improvement companies recently got nailed on Wall Street when they reported lower earnings. Several leading retail companies also are showing weaker results. That could mean consumers are less willing to open their wallets for new purchases," Alexander adds.

It might also mean foreign investors are ready to open their wallets as well. John Grassi, managing director and CIO at San Francisco-based Shorenstein Co., says 2001 could be a year when overseas investors return to the market as buyers and sellers become serious about finalizing transactions.

"Everyone is waiting to see who the foreign buyers of properties will be," says Grassi. "The Germans might be coming back, but it would be problematic, especially with the Euro so low. The strong dollar might affect some other buyers as well."

He added that industry professionals are uncertain whether REITs are going to reappear on the buying scene, whether opportunity funds will become more active or whether pension funds will now become a dominant player in real estate.

"Opportunity funds could seek to unload properties they bought between 1996 and 1998, and REITs could come back selectively. Last year, the volume of transactions was the lowest in a long time," adds Grassi. "It seemed like gridlock between motivated sellers and committed buyers. Everyone is waiting to see if the logjam breaks in 2001. I think the pressure is building on some for the final disposition."

Many prognosticators looking into their crystal balls say the good times will indeed continue to roll, albeit at a more modest pace.

Most say employment growth will continue, and new workers need offices. The workers who fill those offices need homes. And since retail follows rooftops, there will be more residential and multifamily expansion in the future.

Office forecast "Next year will be similar to the back half of 2000 - a solid leasing base coupled with a solid and realistic sales activity level," says Stephen B. Siegel, chairman and CEO of New York-based Insignia/ESG Inc.

"In most of the U.S. markets there will be a decent balance between supply and demand, with the exception of cities such as Boston, San Francisco and New York, which still have a strong landlord market and the potential for serious space shortages. That potential will fuel increased development," says Siegel.

2001 should be a good year, he adds, with decent corporate profits, a healthy business environment, interest rates leveling off, and recovering overseas markets that continue to enhance corporate profits. "I think 2001 will have a decent business outlook in a good economy," says Siegel. "Even if we have a recession, and some people assume we have to have one, it will be a short one - if it occurs at all."

Victor J. Coleman, president and COO of Arden Realty, a Los Angeles-based REIT, agrees the coming year will be a bright spot for many office markets, particularly in the Golden State. He says he expects to see an increase in rental rates and growth in the real estate market during the next 12 months.

"There is very little supply of product coming on line throughout the entire Southern California marketplace to make an impact on any type of growth level," says Coleman. "We think we'll see a continual strength in the economy."

The REIT market will see a strong level of growth, predicts Coleman. "The general tenor is that things are pretty good, he says. "Of course, there is an underlying level of skepticism that we've had it good for so long, people are now wondering when the other shoe will drop."

Clark S. Gore, executive vice president of Atlanta-based Holder Properties, agrees. He notes some prophets have questioned the strength of real estate markets in places such as Atlanta, but the real estate demand continues to confound critics.

"The question has always been, `How long can the momentum [in Atlanta] hold up and when does the down cycle begin?'" asks Gore. "But every year we trend positively in absorption and maintain a reasonable balance between supply and demand. The naysayers have been watchful and they continue to be surprised - as are some local residents - that we have maintained such strength."

Gore says he sees the real estate market for 2001 "much like 2000, as long as there aren't danger signals of rising interest rates, which may slow the market down. He adds that one of the wildcards in 2001 is the stock market, "but that continues to behave with a reasonable level of stability. Some days the market spikes up and some days down. I think our national economy is as strong as I can remember."

Retail's future The office market is not the only sector that expects 2001 to be bright. Jonathan Hipp, senior vice president of the retail investment division in the Northern Virginia office of Northbrook, Ill.-based Grubb & Ellis, envisions real estate next year to be as good as 2000.

"There is a lot of investor demand out there," explains Hipp. "People are looking to buy properties in Northern Virginia. If you want a groceryanchored center, it's hard to find. It's simply a function of supply and demand - less supply and the same amount of demand. We think the market will continue to do well."

Hipp adds that cap rates are rising, but there are still a lot of buyers. "We're excited about next year," he says. "If we can get the product, we'll do well, and there is still plenty of construction. We think that next year should continue to do well because there is so much demand for housing in the suburbs, and retail is going to follow."

Obviously, if there are major economic changes - such as interest rates spiking - this will change the dynamics of the market, he adds.

"With continued job growth and a strong economy, retail stores attending to personal well-being will become increasingly popular in the coming year," predicts Mike McCarty, senior vice president of market research at Indianapolis-based Simon Property Group.

"Retail concepts targeting the home and hearth will expand," notes McCarty. "Average store size will continue to increase. Multi-channel retailers (e-tailers and catalogers) will accelerate the opening of bricks-and-sticks locations, and new communication initiatives such as broadband networks will change the way retailers process information and how they communicate within their company and with their customers," adds McCarty.

Even so, 2001 will bring some new challenges to the retail scene, says John Bucksbaum, CEO of Chicago-based General Growth Properties. "I think we'll all be watching the theater industry, because that's an issue for all of us and it will continue to be important. Of course, it's hard before the holidays to know what the next year has in store because the holidays aren't a good indicator."

Bucksbaum believes e-commerce will continue to be important and notes that some of the euphoria from 12 months ago has subsided. "There have been some problems with e-retailers, but we will continue to see a convergence of e-tailers with brick-and-mortar retailers, particularly in pure-play electronic retailers," he continues.

"I think we'll also see broadband taken into the properties because it affords retailers many new opportunities to increase business and create a new branding awareness."

Marketing sponsorships, which started slowly this year with the Mills Corp. and the Discover Card, will become more prevalent in 2001, says Bucksbaum. "But employment is still the key. If the strong employment continues, that will be good for everyone because people have paychecks. Those paychecks create discretionary income and keep retail sales strong."

Multifamily's outlook Hence, it stands to reason that since retail typically follows rooftops the real estate oracles expect 2001 will be another banner year for the residential and multifamily industries.

G. Ronald Witten, president of M/PF Research of Dallas, says there are several indicators from a supply-demand perspective that suggest the apartment market has a relatively rosy future in 2001. First, with a few exceptions, construction has been disciplined in most parts of the country.

"This entire cycle is unlike the development cycles of the 1960s, 1970s and 1980s, because multifamily starts have been very much tempered to match demand," according to Witten.

"There appears to be some construction discipline that wasn't there in prior cycles. Permits in new construction are down 14% nationally and starts are flat compared with where they were a year ago. If you stack up the strong market conditions we have today with the healthy rental demand against static or even declining construction volume, 2001 looks very positive," according to Witten.

Witten adds that even if the industry enters a noticeable recession - and the expectation is for a slight slowdown but not a serious one - rental housing will be less affected than in the past. Why? Mortgage rates.

"Interest rates have trended up the last 18 months and that, coupled with home prices that have risen through this cycle, makes it more challenging for a renter to buy," says Witten.

"Secondly, any slowdown in the economy will translate into weaker consumer confidence, which means fewer people will be willing to sign a mortgage. Both of those factors will help rental housing," he adds.

One sector of the multifamily market that has a few clouds on the horizon is the seniors housing sector, says David Freshwater, CEO of The Fountains, a Tucson, Ariz.-based privately held company which owns 18 senior living communities across the country.

"The seniors housing industry has been turned upside down because of the sub-par performance of public market companies," says Freshwater. "A massive correction is still occurring in the industry; lenders have pulled in their horns. There is still some equity chasing good deals, but I think in certain markets we'll see very little activity until there is a better absorption of existing product available," explains Freshwater.

Freshwater believes there will be consolidation in the industry but growth may slow. "Companies that have cash and want to buy properties that have not worked out will have some opportunities in 2001," he adds. "We have cash and are keeping it readily available to look for opportunities in the industry."

Industry observers add that the multifamily industry also will experience technological improvements. "Technology will become important in the year 2001 as owners seek to maximize investment returns," says Jay Harris, vice president of property management for Washington, D.C. -based National Multifamily Council.

"One area is property management software," he adds. "We're seeing both in-house efforts developed by industry providers and software offered by others."

Alexandria,Va.-based AvalonBay, United Dominion Industries of Charlotte, N.C., and Atlanta's Post Properties have come up with Realeum property management software that provides services across their portfolios. It's unique in that the companies developed the software in-house. The companies have developed an integrated package, ranging from a resident's request for maintenance to the processing arrangement.

The second trend, Harris says, is e-commerce. "There are new independent ventures that some multifamily companies are investing in while others are paying a fee for service in order to purchase products in bulk."

"That is a way of reducing costs for items such as chlorine, paint or rugs," explains Harris. "The Internet provides the opportunity to help manage the supply chain more precisely."

Hospitality's future Pundits agree that managing a supply of ever-increasing guests will be the challenge of the hospitality industry in 2001.

John Fox, senior vice president in the New York office of San Francisco-based PKF Consulting, says the hospitality industry in 2001 will experience another profitable 12 months in most major cities. "I think we're going to have another good year with occupancies in major cities increasing to nearly 71%, with yet another slight increase next year in revenue," he says.

"Our survey of 46 cities shows that occupancy in 2000 is an estimated 71.4% and will increase to 71.8% in 2001. Overall, room rates in 2000 were $120.93, and we see that rising to $124.95 in 2001," notes Fox.

Fox cites the New York City hospitality sector. "We've had a good run the past several years with room rates and occupancies increasing significantly, and the market is still going crazy," he says. "We're at record occupancy levels and room rates, despite adding 4,000 rooms this year. We'll add 3,000 rooms next year. Of course, all of that is in the context of a good economy," says Fox.

Christopher Nassetta, president and CEO of Washington, D.C.-based Host Marriott, also foresees continued good times for the hospitality sector. "I think from an industry point of view, 2001 looks like it is shaping up to be a good year," he says. "RevPAR (revenue per available room) may not be as strong as this year, but the industry looks good for future growth."

He adds that advance bookings for next year look strong, although the industry sees a slowdown from the strong growth of this year.

"Of course, our business depends on the economy," says Nassetta. "From what we see, it looks like the Fed has been effective in orchestrating a soft landing. Growth will be moderate, but it will not fall off a cliff, which means we ought to have growth but just not as strong as this year."

2001 will be just as strong as the previous year, with supply tapering off and occupancy increasing, agrees Stephen Hennis, director of research in the Boulder, Colo., office of Mineola, N.Y.-based HVS International. He says RevPAR will probably not increase as strongly as it has in the past few years, "but it will increase faster than inflation, so rates should increase."

"We're still seeing a lot of new construction on the horizon, but nothing that will be disastrous such as a large over-supply or saturation," says Hennis. "Of course, some markets warrant caution, but we are not looking at any major issues over time."

A number of others are also impressed by the hospitality industry's prospects for 2001. Art Adler, managing director of the Americas at Jones Lang LaSalle Hotels based in New York, is upbeat about 2001.

"The future seems bright if current performance is any indicator," says Adler. "We've been very active recently with $250 million in financing for eight hotels. I think industry fundamentals will hold up extremely well. The forecasts for demand growth have increased since the beginning of the year, and new supply is being curtailed by lack of public capital. A lot of the major hotels that opened in 1999 were started three years ago," concludes Adler.

Industrial's future Another sector of the real estate industry that is seeing a lot of construction is industrial. "Industrial will probably have a continued healthy supply and demand balance," explains James L. Dieter, executive managing director at the U.S. industrial group for Insignia/ESG Inc. based in Chicago.

"We've witnessed a strong market the last couple of years, and I don't see that changing," he says. "It's possible things will slow up a bit in 2001, and if that happens, absorption will be down a bit. But we've had very good years in the industrial marketplace, so a slowdown would be compared with the good years we've had before."

If a slowdown appears to be on the horizon, developers may decrease their spec development, adds Dieter. "We're beginning to be more cautious. There might be a slowdown that could affect the supply part of the equation, then demand could slightly overtake the supply, which would affect the build-to-suit part of the market," he says.

Dieter notes that most regions of the country will continue to have strong industrial demand. "It's usually the same names popping up," he says.

"The Lehigh Valley area outside Philadelphia has one of the strongest markets, but there are also strong markets in Charlotte, N.C., Columbus, Ohio, and Indianapolis, where there is a lot of spec building under construction," adds Dieter.

Rich Horn, president of Duke-Weeks Realty Corp. of Indianapolis, agrees that the industrial marketplace appears to be strong.

"I think the markets will stay in shape in 2001," says Horn. "Some cities have slight areas of overbuilding. Activity during the last half of the year seemed a little slow, but that was in contrast to the first half of 2000, which was surprisingly strong. Overall, I think we'll see decent activity, but it will be below the peak of activity we've seen the last few years."

Even so, industrial opportunities in 2001 lie in submarkets and niches, particularly for projects such as build-to-suits, according to Mike Luecht, president of the McShane Corp. of Rosemont, Ill.

"We're developing speculatively in the remaining hot markets that we sense are not in equilibrium but where tenant demand continues to outstrip supply," says Luecht.

"We have a heavy speculative pipeline in Chicago and Austin, Texas, for both office and industrial, and I'm excited about that. We're also extremely bullish on Houston. The job growth there remains strong, as a result the demand for the right product is available," adds Luecht.

Luecht says that niche plays will be smart ones in 2001. "Cities such as Phoenix and Houston are intriguing because they are great niches."

Clyde E. Wills, president of the Butler Buildings Division of Kansas City, Mo.-based Butler Manufacturing Co., believes the building market will be flat to slightly weaker in 2001 compared with 2000.

"The markets that could see some softness include heavy manufacturing, amusement parks, hospitals and health treatment facilities," says Wills.

"We foresee good activity in the market for distribution centers, especially for bulk storage facilities," he continues. Vacancy rates are low in the most desirable of these buildings across the country. Most new projects that are under development feature cross-docking capabilities and are organized for fast and efficient merchandise flow-through," adds Wills.

Players in the real estate industry say funds for real estate development will continue to be available in 2001 for the right projects.

Kerry French, senior vice president and senior director of Stockton, Luedemann, French/Jackson & West, a Houston subsidiary of Phoenix-based Northland Marquette Capital Group, believes capital, both debt and equity, will be readily available for well-conceived real estate development in 2001.

"I believe that interest rates for commercial real estate debt will be lower by mid-2001," says French. "The Fed has done a good job in its watch-dog role, and our strong national economy should rule throughout the year. Exceptions to this would be political disruptions created outside the real estate marketplace."

French believes that the capital markets will continue to require more equity to finance real estate. "The days of providing 100% cost of financing are gone. This trend that started several years ago is healthy for commercial real estate, and should continue through 2001," says French.

Giliberto of J. P. Morgan adds that because the industry now has a respectable and significant slice of the real estate business in the public markets, with REITs and CMBS the "integration of public capital markets into broader real estate is having a beneficial effect."

"Capital has become very responsible," says Giliberto."You talk to lenders and nobody is really stretching on it. Conventional lenders are careful about underwriting and loan-to-value ratios. Construction lending is well under control."

"Demand has been stronger than expected, with great job growth, and the supply side has seen remarkable restraint because a building doesn't instantaneously appear on a street corner. We have enough lead-time on supply, so we can see out to 2001 and 2002, if there is going to be an over-built situation," he adds.

What will really happen in 2001? While predictions and prognostications should be of interest to virtually every real estate entrepreneur, it shouldn't be viewed as gospel.

Milton Cooper, chairman of New Hyde Park, N.Y.-based Kimco Realty Corp., says "even if I had a crystal ball, all that one can do is focus on his own business."

Cooper adds that the only constant in life is change. "We live in a world where events can change things rapidly - and they do."

Predicting precisely how the industry may fare in 2001 is a coin toss at best, but perhaps Miss Pontoon provides the definitive answer.

The cards of Mia Pontoon predict wealth and success in 2001 for the industry

What does Tarot card expert Mia Pontoon envision for the real estate industry in the short term? "For me, the success cards - love, business or health - are aces, eights and sixes, and for a number of months in 2001, I have a lot of them, says Miss Pontoon. "For example, in the month of July, I have an eight. That means a very good month for real estate."

Miss Pontoon says that the Northeast sector of the country will be strong in the first half, as will be the Southeast, but then the activity will taper off. "I'm getting a mixture for the Southwest," she adds while flipping another Tarot Card. "It starts off well in the earlier part of the year and then I don't know. I have the moon card and that tells me there are going to be problems - whether they have terrible weather, a disaster or whatever - but something will happen. But it picks up in the final quarter of the year."

NREI's guest prognosticator says the Midwest will hold its own throughout the year. "This is the area that could generate a lot of success and wealth," she says. "When I turn the cards, I see Jupiter. We have a King, and we have the Empress. The Empress usually means a lot of wealth, and the King can also mean wealth. And if you put in a lot of hard work, you get rewards. The Jupiter card can mean a lot of success as well."

Miss Pontoon also foresees a good year for California and predicts that activity, while strong, will taper off during the year. What follows is a brief exchange between this reporter and the soothsayer.

Sheridan: How about the question on most real estate developers' minds: Will the country experience an economic downturn?

Miss Pontoon: Entrepreneurs can breathe a sigh of relief. I'm getting a little of a mishmash, but the cards say the economy will definitely improve from where it is currently, without a doubt. But I see it tapering off a little later on. But I don't think it's going to be a big difference.

Sheridan: Will there be overbuilding?

Miss Pontoon: There will be.

Sheridan: Will e-commerce have an adverse effect on the real estate industry?

Miss Pontoon: Yes, it will.

Sheridan: Will the hospitality industry have another good year or will there be more rooms than guests?

Miss Pontoon: I see them continuing where they are. They're going to hold their own.

Sheridan: So, in short, the cards say real estate will have a good year in 2001?

Miss Pontoon: Yes, it's going to be a better year. And if it is, those real estate developers will have to send me a bonus.

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