Real estate's office sector shows strong performance

Commercial real estate lending has slowed since last fall, but the industry appears strong and able to withstand any downturn in the U.S. economy, according to market analyst reports to the National Association of Realtors.

Within the commercial real estate industry, the office sector is proving a strong performer, with a balance of supply and demand, low vacancy rates and property values rising to levels unequaled since the late 1980s, according to a release from the NAR.

An outlook for the commercial real estate sector was provided during a forum at NAR's Midwinter Governance Meetings.

Forum speakers including Joseph A. Hill, vice president of Lend Lease Real Estate Investments in Atlanta; and George Green, a senior economist for NAR discussed the slowdown in capital for the commercial market and the importance of the secondary market for commercial real estate.

Hill said the commercial real estate industry has not overbuilt greatly in any sector, so each segment of the market likely will remain stable if the nation's economy slows.

A slowdown to a more sustainable growth rate of 2 percent annually should not significantly harm the real estate market, because other indicators are so positive, he said.

The economy added 2.9 million new jobs in 1998, while unemployment fell to its lowest level since 1970, Hill said. Despite the current capital shortage for commercial real estate, he added, the costs of borrowing should remain favorable as well.

Of the five sectors comprising the commercial real estate market, Hill said office properties and apartments are the strongest performers, followed by the industrial and hotel sectors, with the retail sector falling behind the others in terms of performance between those extremes.

The office market is enjoying a good balance between supply and demand, Hill said, and with vacancy rates below 10 percent nationwide, property values are rising to levels not seen since the late 1980s.

"There are very few areas where overbuilding is evident, with those few located in suburban areas. The rebirth of the '24-hour city' in markets like Boston, New York and San Francisco has added to the strong environment for urban office properties," he said. The rate of return on such properties currently is about 20 percent.

Demographics suggest a positive future for the apartment sector, Hill said, as the 20- to-24-year-old age bracket is growing. Any economic slowdown is not likely to affect apartment construction, because apartments are considered a "safe haven" investment in slower growth periods, he said.

In the hotel market, the industry's profits are up, but there is concern that limited-service hotels are overbuilt, Hill said. With a large amount of new property delivered recently, he added, demand for new hotels should moderate. The industrial sector has enjoyed a boost from the strong economy, but continues to face its long-standing difficulties a shrinking manufacturing base in the United States and the trade deficit, Hill said. Vacancies are up in the industrial sector.

Retail property, meanwhile, faces a marketplace of too much space and too little demand, Hill said. Business consolidations have reduced the demand for retail space, and the strong national economy has, surprisingly, not resulted in enormous returns in the retail sector, he said.

Green discussed the association's efforts through the Capital Consortium to increase capital liquidity for commercial real estate. To date, the consortium, which also includes the National Realty Committee and the Mortgage Bankers Association of America, has reduced barriers to commercial mortgage securitization; created uniform documents for commercial real estate loans; and established data reporting standards.

Now, the consortium hopes to gain greater access to pension fund investments, he added.

While pension funds can invest in corporate bonds with ratings ranging from AAA to BBB, he explained, they can invest only in commercial mortgage-backed securities that carry AAA ratings. The consortium is working with the U.S. Department of Labor to establish a more level playing field for commercial mortgage investments, and ultimately open up more sources of funding for commercial financing, Green said.

The National Association of Realtors, "The Voice for Real Estate," is the nation's largest professional association, representing more than 730,000 members involved in all aspects of the real estate industry.

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