ULI reveals forecast for coming year

     The real estate market for this year will remain healthy, although the period through mid-2000 will not be as strong as 1997 or 1998, according to the annual Urban Land Institute 1999 Real Estate Forecast.
      The report said the current real estate cycle is mature, and growth in rents and values will slow as economic growth slows and construction completions reach peak levels, tempering the supply-demand balance that has favored real estate owners and developers in the past several years.
      Launched in 1996, the forecast represents the outlooks of more than 350 land use leaders who share their views on what will happen in the next 12 months in their businesses, sectors, and geographic regions.
      Last year saw strong growth in profits for most real estate-related businesses, but growth in profits through mid-2000 will be well below the pace set in 1998. Whereas 71 percent of respondents projected moderate-to-very-large growth in profits in last year's survey, only 49 percent are projecting such profit growth for the coming year.
      Growth in property rents and values will also slow as construction completions continue at high levels and vacancy rates begin to rise modestly in many sectors. Of 12 income-producing property sectors, the leading categories will be suburban high-rise office properties, multifamily high-income rental properties and downtown hotels. However, the gap between the top and bottom property sectors is narrowing; when it comes to rent growth, the type of property will matter less in the coming year.
      The real estate capital markets should be in relative balance through mid-2000, neither undersupplied nor oversupplied. The real estate investment trust sector will remain capital constrained, and REIT stock prices will not move up substantially until early or mid-2000. This will provide investment opportunities for private equity investors, especially pension funds, opportunities funds, and private developers.
      While all but one of the 51 metropolitan area markets in the ULI survey are expected to see further growth in rents and property values through mid-2000, growth rates will be down substantially, especially for a few markets that were red hot in 1998. The ULI Market Performance Barometer shows that rent and price pressure is expected to fall in 73 percent of the U.S. metropolitan markets surveyed; pressure will be rising in only 2 percent of the market areas.
      The report breaks down forecasts by submarkets of real estate.
      The office sector will be characterized by slowing demand, vibrant construction, a modest rise in vacancy rates, and moderate increases in rents. The risk of overbuilding continues, although this should be somewhat diminished by a more conservative real estate capital market, which will constrain new construction -- and growth in property values -- in the coming year.
      Industrial space markets performed very well in 1998, and they should be one of the better performers through mid-2000 as well. However, a slowing of demand combined with strong levels of construction over the past several years will result in a plateauing or even deterioration of most performance measures; vacancy rates will rise modestly through mid-2000, and rent increase will be more moderate than in recent years.
      Retail real estate remains the most out of favor sector of all income-producing producing properties, but in the coming year retail will be relatively less out of favor than in recent years. Rent growth in this sector is expected to decline less than for all other sectors, and thus rent growth will be similar to that of office, industrial, and apartment properties. As a result, this sector should attract relatively more investor interest through mid-2000 than it has in recent years.
      The hotel sector continues to push onward in spite of signs of excess. While room rates will continue to rise modestly, occupancy levels fell again in 1998 and will continue this trend through mid-2000, the result of continued high levels of construction. Notably, whereas in recent years downtown and upscale properties have generally outperformed suburban and budget properties, this pattern will moderate in the coming year. More and more upscale and downtown product will soon come online, while new construction in budget categories is finally slowing.
      The multifamily housing sector will be a favored sector through mid-2000, with rents rising faster than most other property types, and vacancies holding steady. Demand will remain strong, and construction completions should start to decline in 2000 and 2001. High- and middle-income rental properties will see similar rates of growth in rents -- small to moderate.
      It will be difficult for the U.S. housing market to improve on the year 1998, but it will make a solid run at matching that performance during the coming year. Sales of new and existing homes broke an all-time record in 1998, and construction starts were near record levels as well. Prices and values will not perform as impressively through mid-2000, but should continue to exceed inflation. While the market will likely slow, it will nonetheless be a good year by historical standards.
      The market for resort and recreation properties has been strong in recent years, especially for high-end properties, and this pattern should continue through mid-2000, although there are distinct signs of a slowdown ahead. The prospects are especially good for senior and retirement housing, second and leisure homes, and golf course communities, while resort hotels are the least promising sector, according to the survey. Although the resort and recreation market is susceptible to a sharp slowdown in the economy or a falling stock market, demographic trends will help to bolster the market over the long term.
      The Urban Land Institute is a nonprofit education and research institute that studies land use and real estate development policy and practice. Established in 1936, the Institute has 14,000 members representing more than 26 disciplines in the public and private sectors, including owners, investors, developers, investment bankers, REIT executives, consultants, designers, analysts, planners, academics broker, lenders, and advisors.