Experts Generally Upbeat on Outlook For Real Estate

If the economy had been as strong on Sept. 11 as it had been a year before, there is a good chance that the terrorist attack would not have had as significant an impact as it did.

"We were obviously in a much weakened state," said Christopher J. Niehaus of Morgan Stanley Realty in New York, and that's why he doesn't believe that 2002 will be any improvement over 2001. "Real estate is in a tougher operating environment," he said.

Michael Dow of CRESA Partners in Minneapolis anticipates a bit more doom and gloom for the economy, as he told members of the Counselors of Real Estate at a recent meeting in Washington, D.C.

"There is a danger of a double dip in the recession," Dow said. "There is a serious lack of demand for space in most cities," and instead of new space coming on the market, "there is an enormous amount of sublease hanging over it." Business confidence remains low, while consumer confidence is surprisingly higher than anyone expected. Dow explains the discrepancy by pointing to the consumer's low propensity for saving and high propensity for debt.

"The cutbacks per family haven't yet been seen," Dow said.

Another panelist, Jeanette Rice, was more upbeat on an end to the recession, which predicts will end April 5. Unemployment will do the same July 11 and the office market will reach its lowest point Sept. 6.

Rice, of LendLease Real Estate Investments Inc. in Dallas, points out that consumer components of the economy - the robust housing market and spending -- have been providing real "oompf." Andrew Wood of LendLease in New York said the housing market is being buttressed by cheap and abundant credit. He also said that 80 percent of CEOs surveyed recently thought that their income and sales would grow. And many economists are predicting that this will be the shortest recession ever.

The panelists believe that 2002 will be a crucial year for real estate. It will be a year that will determine whether or not real estate is legitimate and if it is a real asset class. If investments have been made sensibly, Dow believes that real estate will get through the downturn without becoming a whipping boy again.

"Real estate has been the star over the last couple of years," Niehaus said. "It has performed as it should, and pension funds have been trying to increase their allocation in it.

Dow said that good real estate has been a good investment, and he has been surprised that pension funds allocations are only 5 percent.

"Their love affair with the stock market went on far too long," Dow said.

Rice believes that "we will end up a year from now with real estate having weathered the storm. Equity rates will look respectable. But there will be two more quarters of negative investment in the office market." Niehaus called the office market "the at-risk sector, with negative returns because of declining income and cap rates." Multifamily has been suffering from the double whammy of low interest rates and the increase in homeownership. Up until three months ago, many investors thought that apartments were a safe bet, but there has been negative absorption in many markets.

In addition, Niehaus said, Freddie Mac and Fannie Mae have continued financing multifamilies, which has created even more an imbalance.

Commercial mortgage-backed securities have become "the great regulator" of the market, Rice said, "because if someone is 30 days' late on a loan in the CMBS pool, it is public knowledge.

"Our industry has been restructured from one based on appraisal to one based on cash flow," Niehaus said. "Real estate learned its lesson in the last cycle and has stayed with the fundamentals." The recovery of the technology from the wreck of April 2000 remains a big question mark in the economy. Rice believes that the major tech centers such as San Francisco, San Jose and Austin will take a long time to recover.

Dow believes that the delay is partly due to the relative unwillingness of businesses to change their technology to the next generation.

"If you believe the Federal Reserve numbers, we will not grow out of the tech wreck until 2004-05," Niehaus said.

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Written by Al Heavens
March 21, 2002