Real estate susceptible during economic slowdown, experts say

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Although the real estate industry buoyed largely by the housing sectorhas remained relatively stable overall through the economic slowdown, it is not immune to the current economic uncertainty and will be vulnerable if the economy slips back into a recession, according to industry experts at the Urban Land Institute's recent annual fall meeting in Las Vegas. |ret||ret||tab|

Predictions for the economy and the real estate industry were provided throughout the meeting by several analysts, most of whom concurred that the short-term outlook is clouded by uncertainty due to several factors, including the possibility of war, low or no domestic job growth, shrinking state government budgets, corporate corruption and shaky consumer confidence. |ret||ret||tab|

While it's possible that the economy can withstand such a variety of unknowns and stay in a period of slow recovery, it's more likely that the United States will re-enter an economic recession, the analysts cautioned.|ret||ret||tab|

"What's clear is that we are not out of this (an economic downturn) yet," said Kenneth T. Rosen, chairman, Fisher Center for Real Estate and Urban Economics at the Haas School of Business in Berkeley, Calif. |ret||ret||tab|

According to Rosen, the nation currently has a "dual economy," with consumer spending, single-family housing, home mortgages (including refinancing), defense spending and health care staying strong; while telecommunications, technology, stocks, state governments and the airline industry are growing weaker. |ret||ret||tab|

Moreover, the overall economic picture is marked by stark regional differences, he noted, citing robust job growth in Southern California, Las Vegas, Miami, Charleston, Jacksonville; but sluggish job growth in Northern California, Seattle, Boston, Austin, Atlanta, Hartford and Denver. |ret||ret||tab|

However, Rosen pointed out that despite weakening fundamentals such as rising vacancy rates and lower rents in the office and multifamily markets, capital continues to be readily available. "The capital markets are chasing real estate right now, because it is the least worst alternative," he said. |ret||ret||tab|

Meanwhile, the retail and for-sale housing sectors have been boosted by consumers, who until recently, have been willing to spend and seemed unfazed by economic uncertainty, Rosen said. Whether these sectors "shift to the red zone" depends on further drops in consumer confidence, he noted. |ret||ret||tab|

The single-family housing sector, considered the star performer in the current economic environment, faces some risk in the months ahead, said Mark M. Zandi, chief economist of Economy.com in West Chester, Pa. "Low mortgage rates and aggressive mortgage lending really juiced up the market," he said. |ret||ret||tab|

Zandi listed several "highly overpriced" markets including: Washington, D.C.; Miami; Fort Myers; Sarasota; Newark; Boston; Denver; San Diego; San Francisco; San Jose; Tacoma, Wash,; and Colorado Springs, Colo. Such markets are susceptible to home price declines if the economy does not improve, he said.|ret||ret||tab|

A fiscal stimulus in the form of an extension of unemployment benefits, more federal aid to states, and pushing forward tax cuts is needed, Zandi said, noting that future interest rate cuts by themselves will not be sufficient. "We need help. If we don't get some (help) and some luck, we will be back in a recession," he said. |ret||ret||tab|

Given the current environment of mixed signals and mixed markets, investors and developers should pursue more specific, niche-oriented opportunities than more broad-based expansion opportunities, said Michael Pralle, president and chief executive officer of GE Capital Real Estate in Stanford, Conn. "It is difficult to forecast where the economy is goingwe see sideways movements until 2004," Pralle said. |ret||ret||tab|

He noted that corporate profits have shifted dramatically, from a five-percent increase between the second quarter of 1999 and 2000, to a decline of nearly 16 percent between the second quarter of 2001 and the second quarter of 2002. |ret||ret||tab|

A broad economic turnaround hinges on consecutive improvement in corporate earnings and increased corporate investment, Pralle said. "To get the economy moving, corporations need to start spending on capital goods," he said.|ret||ret||tab|

In general, the commercial real estate industry typically "lags behind" the general economy in terms of recovery, Pralle said, because landlords are not in a position to raise rents until tenants are confident enough in the recovery to start hiring. "The real problem is taking positions in real estate before a turnaround becomes common knowledge," he said. |ret||ret||tab|

However, Pralle noted that while the commercial sector took four years to recover from the 1991 recession, this recovery period which he predicted will start late next year will be shorter, because "massive oversupply is not a problem" and real estate capital is available.|ret||ret||tab|

"For owners who are accustomed to ever-improving conditions, the current market, characterized by declining occupancies and flat-to-falling rents, feels worse than it is," said Lloyd Lynford, president and chief executive officer of Reis, Inc. in New York City. |ret||ret||tab|

Lynn M. Sedway, executive managing director of the Sedway Group, part of CB Richard Ellis in San Francisco, pointed out that it's important to view the current economic environment in perspective. "Keep in mind that this is a period following tremendous growth. When a vacancy rate (for apartments) that was 2 percent is now 5 percent, you feel like you've been kicked in the stomach. But a 5 percent vacancy rate is not so bad," she said. "People have confidence in the long-term prospects for the economy. When they buy homes, they are not acting irrationally."|ret||ret||tab|

A similar view was expressed by Susan Hudson-Wilson, founder and chief executive officer of Property and Portfolio Research in Boston. "Consumer confidence is okay compared to the irrational exuberance" of the boom years, she pointed out. |ret||ret||tab|

She predicted that consumer spending and worker output will remain strong, because both are being driven by baby boomers who are now in their peak years for income earning and productivity. |ret||ret||tab|

"While the stock market has lost $8 trillion, real estate has gained that muchReal estate will stay stable despite the economic slump. It's not doing anything weird, it's just performing," she said, adding that the single-family sector, for first and second homes, "is a wonderful place" for capital to flow. "We could talk ourselves into a recession, but there's no need for it, and we shouldn't," Hudson-Wilson said. |ret||ret||tab|

The Urban Land Institute is a nonprofit education and research institute supported by its members. |ret||ret||tab|

Its mission is to provide responsible leadership in the use of land in order to enhance the total environment. Established in 1936, the Institute has more than 17,000 members and associates representing all aspects of land use and development disciplines.|ret||ret||tab|

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