Real estate continues to draw capital despite rising vacancy rates and falling rents in the office and apartment markets.

That’s the consensus of a group of experts who met two weeks ago in Washington to discuss real estate industry trends. The meeting was sponsored by the Urban Land Institute district council in D.C.

Whether this trend will continue is hard to predict, owing to uncertainty over foreign and domestic policy issues. Susan Hudson-Wilson, founder and chief executive officer of Property and Portfolio Research in Boston, said that there are things about the economy to be happy about and things to be “crabby” about.

Economic positives include steady though small increases in the gross domestic product; sustained retail sales; low interest rates; high home price gains; a decline in office, industrial and retail construction, and strong bank earnings. Combined, these plusses outweigh the familiar minuses, including shaky consumer confidence; little to no domestic job growth; rising unemployment; minimal overall business expenditures and a rapidly rising federal deficit.

On the whole, real estate still appears to be the investment vehicle most able to withstand a variety of unknowns, she said.

“Even if the economy continues to falter, real estate remains the safest place to be,” Hudson-Wilson said. Because real estate has consistently outperformed other forms of investment, capital continues to flow into real estate from a variety of sources such as pension funds, foreign investment companies, and private investors, with the sum total approaching $90 billion.

However, the amount of capital available at low interest rates is resulting in some unwarranted construction, specifically apartments.

In the multifamily sector, vacancy rates are up, but construction is continuing because builders have ready access to capital, not because of high tenant demand for space.

“That’s a fool’s proposition,” said Peter D. Linneman, Albert Sussman Professor of Real Estate, Finance and Public Policy at the Wharton School of Business at the University of Pennsylvania.

Owner-occupied housing – the star of the real estate industry – has been boosted in part by a strong anti-growth sentiment permeating many communities, which has effectively restrained supply and driven up home prices, he said.

Terrorism remains the wild card that could affect any kind of economic growth.

“My big fear is that there will be a terrorist attack somewhere besides D.C. or New York, somewhere other than the nation’s government center or corporate center,” said Stanley F. Duobinis, director of forecasting for the National Association of Home Builders.

Such an incident would likely instill a widespread fear that terrorism “could happen anywhere,” wreaking havoc on consumer confidence,” he said “That would be a serious problem.

As yet, fears of terrorism do not seem to be influencing decisions to buy or rent in specific buildings, neighborhoods or markets.

Robert D. Youngentob, president of Eakin/Youngentob Associates Inc., in Arlington, Va., said he places terrorism into two categories: the relatively limited-impact kind, such as a car bomb, that probably would not affect consumer decisions on moving, and a large-scale catastrophe caused by bioterrorism or a chemical attack, which could drive people out of entire areas.

Employment is a much stronger factor affecting home purchases and rentals, said Christopher LoPiano, senior vice president and mid-Atlantic development manager for the Bank of America Community Development Corp. in Washington.

“A bigger issue (than terrorism) for us is job growth. A continued weak employment picture will erode demand for housing at some point. The number-one reason we see for move-outs is job-related,” LoPiano said.

Bryce Blair, chairman, chief executive officer and president of Avalon Bay Communities Inc. in Alexandria, Va., said a primary reason for the weak national apartment outlook is job losses.

Given that there generally is a lag time of several months between losing a job and changing housing, the fallout of previous job losses has yet to hit the housing market, he said.

For the long-term, the “echo boom” generation – the nearly 80 million young people born between the early 1980s and 2002 – has the potential to boost the apartment market in the years ahead, with demand particularly high for less expensive Class B and Class C space.

The more expensive Class A space is likely to become increasingly popular with empty-nester baby boomers who choose to rent, rather than own.

Developers need to start preparing now to accommodate growth and demographic changes such as a larger, more healthy elderly population; more childless and “non-traditional” households, and more immigrants.

Such growth “has big implications,” Blair said. “We need to be focusing on 10 to 20 years out.”

Published: April 24, 2003

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