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17 October 2002
Emerging Trends in Real Estate Report: Commerical Real Estate Experts Predict delayed recovery until 2004
Washington, D.C., New York City Rank as Top Commercial Markets In 2003 - Lend Lease Real Estate Investments and PricewaterhouseCoopers Issue
NEW YORK, October 17, 2002 - The weak economy and its related effects will soften the U.S. commercial real estate markets for at least another year, according to the commercial real estate industry’s most comprehensive annual forecast, Emerging Trends in Real Estate: 2003.
Rising vacancies, corporate belt-tightening, downward rents and rising expenses will make 2003 a problematic, but manageable, year for investors. It may also extend the recent shallow market downturn, according to the report published annually by Lend Lease and PricewaterhouseCoopers. The expected Emerging Trends scenario is “doldrums - not despair.” Real estate’s attractiveness has been income security, and that security could come under stress the longer the economy remains sluggish. Despite the “torpid” near term outlook, most indicators point toward a recovery in 2004.
According to the report, real estate’s performance remains firmly situated between high-grade bonds and stocks on the risk parameter scale. Returns for 2003 are forecast in the mid to upper single digits and annualized long-term returns (over the next five to seven years) will concentrate in the 7 to 8 percent range. In the face of recent stock market declines, “the property sector is regaining a large measure of its reputation as a reliable, less mercurial, bond plus investment.”
The report provides a comprehensive overview of opportunities, where investors may increase their chances of success in the commercial real estate markets. Investments in certain property types, such as warehouses in major transportation hubs, offices in established 24-hour markets, apartments and grocery-anchored shopping centers are expected to deliver solid income-oriented returns next year. With returns registering in the high single digits, ‘Double B’ commercial mortgage backed securities should be solid performers offering less volatility than REIT stocks. Finally, investors adding to their portfolios may find it advantageous to continue to capitalize on low interest rates by borrowing and leveraging up returns.
Investments to avoid include: limited service hotels, where there are too few barriers to entry and too many brands; most suburban office buildings; offices in 9-to-5 downtowns (commercial markets without strong residential underpinnings); and development projects – before new construction is justified vacancy rates need to decrease.
The top five markets to watch for 2003 continue to be dominated by 24-hour cities with strong residential neighborhoods, multifaceted environments and diversified economies:
| 1. | Washington, D.C. - The nation’s capital took the top spot for the first time since 1995, reflecting its status as “a relatively recession proof island of security.”
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| 2. | New York City - In the Big Apple, “price per pound increases on prime office” and “returns diminish…as buyers pounce on well-leased midtown buildings put on the block.”
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| 3. | Southern California - The only suburban market in the top five “features the nation’s best multifamily markets and great warehouse centers.”
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| 4. | Chicago - Remains a “good solid market and the place to be in the Midwest…but 2003 will be a bottoming year.”
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| 5. | Boston - Should stabilize in 2003, with office rents edging up in 2004. |
High growth suburban markets - Houston, Denver, Phoenix, Dallas and Atlanta showed further weakness in this year’s survey. Perennial favorite San Francisco shows diminished prospects after its recent decline.
Other key findings of the report indicate:
 | As long as capital flows chase prime, well-leased properties, prices will stay high. But buyers will shun more marginal, commodity properties, possibly leading to material value declines.
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 | REITs dominate the institutional equity pie with a 43 percent share, followed by pension funds (37%), foreign investors (11%) and insurance companies (8%). Total equity has increased from $223 billion in 1992 to a current value of $406 billion.
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 | On the debt side, commercial banks’ share of invested debt capital is 42 percent, followed by CMBS issuers’ (16%), life insurers’ (12%) and foreign banks’ (11%). Institutional debt has nearly doubled since 1992 and now totals more than $1.85 trillion.
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 | Private limited partnerships, sponsored by a diverse mix of local syndicators, have renewed their investment presence after a long absence, making inroads in markets once the province of institutional investors. Flight capital from the stock market seeks a safe haven in real estate. |
The report identifies specific indicators for a sector rebound in 2004 that include greater marketplace structural stability from the dominant REIT and pension fund presence; limited imprudent development via relatively controlled capital flows; and attractive yields and positive returns that will continue to outpace most other investment vehicles.
Click here to view the Emerging Trends the report. [1.1mb pdf file]
Now in its 24th year, Emerging Trends in Real Estate® is published by PricewaterhouseCoopers and Lend Lease Real Estate Investments. The report is based on interviews with more than 170 leading real estate authorities - investors, developers, analysts and managers. Copies of Emerging Trends in Real Estate® 2003 are available for $95 by emailing emergingtrends@lendleaserei.com or susan.m.tromp@us.pwcglobal.com. Alternatively you may call Susan Tromp, 631-234-5143 or Bonnie White, 212-779-5872.
Lend Lease is a leading global real estate group comprising two businesses: Real Estate Solutions, providing a full range of project management, construction, development, capital structuring and consulting services; and Real Estate Investments, serving clients who invest in real estate equity or debt.
Lend Lease is one of the largest real estate investment managers in the world with US$49 billion of assets under management. The company has $38 billion in real estate and commercial mortgages under management for institutional and private clients in the U.S. Lend Lease’s investment programs cross the risk/return spectrum for both equity and debt capital, and in the public and private markets. In addition, the Group operates a leading U.S. loan servicing company, CapMark Services, for the benefit of clients investing in real estate-related debt.
Listed on the Australian Stock Exchange, the Lend Lease Group operates in 43 countries on six continents, with a significant presence in Australia, Asia, Europe, and the United States.
PricewaterhouseCoopers (www.pwcglobal.com) is the world's largest professional services organization. Drawing on the knowledge and skills of more than 125,000 people in 142 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet-enabled world.
PricewaterhouseCoopers refers to the member firms of the worldwide PricewaterhouseCoopers organization.
Contact:
| Lend Lease Real Estate Investments, Inc. | For Lend Lease |
| Jonathan Miller | Rodger Van Allen, Rubenstein Assocs. |
| (212) 779-5867 | (212) 843-8282 |
| jmiller@lendleaserei.com | rvanallen@rubenstein.com |
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| For PricewaterhouseCoopers | |
| Gerard Carney, Gavin Anderson & Co. | |
| (212) 515-1941 | |
| gcarney@gavinanderson.com | |
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