The New Year is looming ahead, and you know what that means. Next to making those oft-broken resolutions, your highest-priority should be reviewing both business and personal financial positions.

No, it’s not exactly a fun thing to do, especially since this was not a banner year on The Street. But take heart – good news abounds on the real estate front.

First, recent studies reveal that the underlying fundamentals in the real estate industry remain strong. Investors in real estate should continue to prosper from one of the healthiest real estate markets in history, despite signs of a slowing economy, according to the Fourth Quarter Korpacz Real Estate Investor Survey by PricewaterhouseCoopers.

With no dramatic changes expected in the industry over the near term, some investors’ strategies will remain the same: to acquire Class-A product in top markets. Rents are not leaping like they used to, but returns are still good.

Nevertheless, some investors say they will fine-tune their portfolios in 2001 by focusing on different property types and reinvesting in new geographic locations. For example, some say they are shifting their focus from suburban office space to apartment deals.

Well-balanced market conditions combined with a stable economy have helped to boost stock prices for several REITS. As a result, the survey says many REITS -- particularly office and industrial ones -- will be more active in the upcoming year.

“We expect to see a little bit more REIT capital coming back into the market,” said one survey participant.

Aside from investing in the United States, some established REITs are buying and constructing properties overseas. But the survey cautions that such investments are not free from risk, citing language barriers, cultural differences, and currency issues as major factors deterring many U.S. REITs from investing abroad.

The survey also says that the abundance of high-tech, Internet and Internet-related companies occupying real estate throughout the country is raising red flags with many investors. Survey participants cited several reasons for this trend, including losses incurred by landlords from broken leases.

Survey participants identify downsizing, mergers, consolidations, and overseas capital crises as possible causes of a future economic downturn. Some say that even a simple redirection of international investors’ money could cause such a downturn because, as one investor puts it, “a good part of our real estate industry is being driven by international money.”

Surprisingly, investors say they are less concerned about higher interest rates. While interest rate hikes have hindered some construction activity in various suburban markets, they have not significantly impacted the buying side of the real estate industry, according to the survey. Many of the most active investors in the industry are institutional all-cash buyers such as pension funds and insurance companies.

On the other hand, interest rate increases are affecting the smaller, private buyers' ability to close deals since it is now both difficult and time consuming to obtain financing. Of course, Fed Chairman Alan Greenspan’s recent leaning toward a loosening of short-term interest rates could counteract any hesitation currently invading the market.

According to the survey, some interesting trends are arising across the nation. For example, preferred markets for state-of-the art, Class A industrial properties include Chicago and Dallas. But some other Midwestern markets are not performing as well.

In addition, investors are developing new top-tier regional malls in underserved urban markets like Chicago, while larger, high-growth markets such as Los Angeles are considered better for grocery-anchored shopping centers.

Published: December 15, 2000

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