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Real Estate Times: 

Real Estate Investors Should Stand Firm

Real estate investments will experience a great deal of short-term volatility, but real estate fundamentals are the best they have been in years. 

So says the 2000 forecast by Marcus & Millichap Real Estate Investment Brokerage Company, which encourages investors to stand firm in the coming months. 

The real estate market is much stronger than it was a decade ago, according to the report. In office, apartment and retail markets across the country, vacancies are down across the boards, and loan performance is at its strongest level since the mid-1980s. 

Although peaks have passed for some property types, rental growth continues at a healthy pace. Plus, the artificial incentives that used to result in overbuilding have been largely removed, resulting in a more market-driven supply. 

Volatility already is evident in the market, with the number of overall investment real estate transactions off by about 10 percent this year compared with 1998. Office property sales were down about 15 percent, and institutional investors cut their transaction levels by about one-quarter. 

Why? According to Marcus & Millichap, there are three major reasons. First, after the buying frenzy of 1997 and 1998, REITs and other institutional investors could not justify paying escalated prices that larger assets were commanding at their cyclical peak. 

Secondly, falling REIT prices in the third quarter of 1998 locked down institutional buying power. Finally, investors were spooked by alleged inflationary pressure and interest rate hikes of recent months. 

But the investment house expects these factors to be more than offset by consistent demand from established industries and increased demand from emerging high-technology companies. 

"The real estate cycle enters a new phase marked by lower rental and value growth, moderately lower sales velocity and increased development risk in a number of markets, but growth should stay positive," said Hessam Nadji, senior vice president and national director of research. "The focus in the institutional sector will be on portfolio and asset management, portfolio tweaking as well as merger and acquisition opportunities." 

In the short-term, the market still will be dampened by higher interest rates, tougher underwriting standards and Y2K-related worries. But these factors should dissolve as the nation's basic economic strength continues to grow unabated in 2000. 

Construction remains high and strong in Atlanta, Dallas, Houston, Phoenix, Las Vegas, Portland, South and Central Florida, and Charlotte. 

Overall, Miami, Los Angeles, Chicago, Philadelphia, New Jersey, Portland, Sacramento, Milwaukee and Houston represent examples of markets with strong value investment opportunities because they are either still in recovery or are experiencing short-term cooling.