While the real estate recovery will lag the general economic recovery in many countries by six to nine months, patient real estate investors in Europe, the Americas and Asia Pacific will see the results of this year’s gradual return to economic health in 2003, according to Market Watch, a global real estate market forecast from LaSalle Investment Management.
“Our take on the global situation is that rent growth and returns in real estate will be well below what investors received in the late nineties,†said Jacques N. Gordon, Ph.D., LaSalle Investment Management’s International Director of Investment Strategy and Managing Editor of the publication. “But, relative to other investment options, real estate still looks fairly priced and able to provide higher yielding, stable income streams than other fixed-income instruments.â€
U.S. real estate still expected to produce attractive real returns
“The combination of weakening real estate markets, low inflation and plentiful capital means that unleveraged real returns from private real estate will likely fall below levels achieved in the late 1990s, but adding real estate to institutional portfolios still makes sense,†according to William J. Maher, LaSalle Investment Management’s Director of North American Research and Strategy. To support this view, Maher cites the following:
· With inflation expected to stay low at under three percent, real rates of return are likely to be in line with or above historical averages.
· Borrowing rates are low both on an historical basis and relative to initial real estate yields. Therefore, leveraged returns will stay relatively high.
· Unlike domestic equities, which are still priced significantly above long-term trends, real estate is fairly valued by historical standards.
· Real estate may outperform other asset classes. While it is very difficult to forecast stock market returns in the short-term, some observers believe that U.S. equities could post single digit returns over the next several years. Real estate can do at least as well, but with less volatility.
· The real estate market and the economy are near cyclical lows. As both recover, returns could be higher than currently anticipated.
U.S. office markets look forward to recovery after difficult 2001
“This year brings good news to office property investors,†said Jeffrey Havsy, Vice President of Research of LaSalle Investment Management. “The worst appears to be over for some markets, as the quantity of sublease space being added to the market has stabilized and new deliveries are declining.â€
“We expect office markets to recover 12-18 months after the economy starts to rebound,†he continued. “Six to nine months after economic recovery begins, firms increase their hiring rates and more office space is needed for the new workers. With this in mind, absorption should rebound robustly in 2003.â€
Havsy attributes the rebound of the office sector to three key factors:
· Firms reacted more rapidly to the economy’s most recent slowdown than they did to earlier downturns. LaSalle Investment Management anticipates firms will react in a similar manner on the upside as the economy recovers.
· Developers also reacted quickly to the recession. As a result, new deliveries are expected to drop dramatically, causing a reduction in available space.
· As the economy recovers, firms may pull a portion of the sublease space from the market, a trend that has already started in many markets across the United States.
Office vacancy rates are likely to peak mid-year, but will decline before year-end, finishing at just over 14 percent. Rents are likely to decline slightly or remain flat, but large concessions are unlikely on a national basis. The exceptions to this include several tech markets with vacancy rates above 17 percent, which will see aggressive concessions and falling rents.
LaSalle Investment Management recommends that conservative investors looking f
