Real Estate Research
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Publicly Traded REITs.
The public REIT market, which has produced several years of very high returns, experienced a sharp correction in 2007. As they are already tradingat a 20% discount to their net asset value (NAV) and with strong balance sheets andasset quality, REITs should rebound with modest returns of 5% to 10% in 2008, withlarger gains occurring in the second half of 2008.
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The Economy.
Real GDP growth will decline to a mid-cycle trough in 2008 toapproximately 1.9%, well below trend for the US economy. During the first half of theyear, the economy will be particularly slow, dangerously close to recessionary levels.
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The Property Markets
. Primary consideration should be given to those metropolitanareas where economic growth should be the strongest. The strongest markets havehigh exposure to international financial and professional services, defense, trade,medical, and high-tech industries. The US will have comparative advantages in theseindustries on a global basis. Such “Globally-Linked” markets should achieve particularlystrong economic growth. This economic growth will continue to produce broad-basedactivity and increases in space demand. These markets also typically provide above-average income levels, reflecting their “knowledge-based” foundation. They include:Boston, New York, Washington DC, Raleigh, Charlotte, Miami, Fort Lauderdale, Austin,Houston, Seattle, Portland, San Francisco, San Jose, Los Angeles, Orange County andSan Diego. However, not all of these markets are supply constrained or achievebalanced supply-demand fundamentals for all property types in all submarkets.
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Apartment Properties.
This sector has some of the best prospects in an environmentof declining economic growth. However, there is a bifurcation between strong steadymarkets and those that are experiencing excess supply. Vacancy rates increased onlymodestly in 2007, largely due to a severely over-built for-sale housing market, whichalso included failed condominium conversions. In many markets, these excess units areentering the rental pool, thereby adding to supply and competing directly or indirectlywith institutional properties. However, some supply-constrained markets suffer onlymodestly from home over-building, and have otherwise strong apartment fundamentals.These markets should produce strong rental gains, even with a slowing economy andshould outperform other markets. Such markets include: New York, Washington, DC,Baltimore, San Francisco, San Jose, Los Angeles and Seattle. Desirable infill locationsin metros with strong economies should also experience superior growth. As theeconomy resumes stronger growth in 2009; demographic trends create increasingrenter cohort household formations and the excess home supply is absorbed;apartment market fundamentals are excellent over the next two to three years. In thenear term, constrained supply apartment markets are expected to be one of thestrongest sectors for rent growth.
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Industrial Properties.
After exhibiting solid improvements over the past four years,with vacancy rates trending down to 9.4% in 2006 and 2007, industrial real estate ispoised for some weakness in 2008. Gateway markets continue to be the most resilientto the economic slow down with foreign trade and high tech as the key drivers for thesector. Major land constrained port markets, such as Southern California, SouthFlorida, the San Francisco Bay area, Seattle and New York/New Jersey will continue tooutperform. Inland distribution markets, such as Dallas, Chicago and Atlanta are nowstrengthening at a later point in the cycle. In general, new development is driven bylarge distribution users. As a result, in some of the major distribution markets whereland is available and affordable, such as Atlanta, Chicago, Dallas/Ft. Worth, and theInland Empire, big-box warehouse construction activity is approaching levels last seenin the late 1990s, so caution should be used in these markets. Nevertheless, infilllocations within these markets should continue to fare well.
THESE LONG TERMFUNDAMENTALS STILLHOLD.
CONDO “REVERSIONS” TOAPARTMENTS ARE STILL ASUPPLY CONCERN.1.2%; DURING2009, NEGATIVE1.8% FORECAST.2010TONEGATIVE.RELATIVELYSTRONG.BETTER THAN OTHER SECTORS.END OF CYCLE.RECOVERY PUSHEDTO 2009.RELATIVELYVACANCY RATESINCREASED TOOVER 11%.
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ACTUALLYDECLINED.
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