Investors see real estate in middle of cycle

Real Estate Weekly, Dec 15, 1999

Real estate investors have regained some of the confidence shaken by last year's Asian economic crisis and the ensuing credit crunch, according to the recent edition of 'Real [Estate Outlook," a twice-yearly survey of institutional real estate investors produced by Cushman & Wakefield in collaboration with the Appraisal Institute.

"Investors' attitudes have rebounded since our last survey this past winter," said Bruce Kellogg, MAI, managing director for Cushman & Wakefield. "More respondents are placing the market in the middle of the cycle rather than at the top, which is where they had it last survey, and more cite it as improving in this survey as well."

A total of 60 percent of the respondents thought the market was in the middle of the current cycle, with a majority of those respondents thinking the market is static. But 26 percent of the total thought the market was mid-cycle and improving. Last survey, 70 percent of respondents thought the market had reached its peak, but that number is down to 39 percent now.

The survey also asked investors how long they thought the current cycle would last. A total of 57 percent thought that the current cycle would shift anywhere from six to 12 months. Very few (four percent) thought less time than that, but 39 percent thought it would be more than one year, with 17 percent responding that it would be more than two years.

"What is interesting was why the investors thought the cycle would shift," said Kellogg. "Typical real estate market forces such as supply and demand and overdevelopment were the number one reason, followed by economic slowdown, tightening of credit, lack of economic expansion and changes in the stock market."

Property Type/Geographic Regions

Included again in the survey were investor rankings of major markets and property types.

The most favored regions, based on market fundamentals such as vacancy rate and absorption, were Mid-Atlantic, Northern California and Seattle. The two least favored regions based on the same criteria were Dallas and Phoenix.

Investors were also asked to rate regions based on value of property. New York City was rated the most overvalued by investors for the third straight survey, but this time the city was tied with New England for the top spot. Other Midwest (outside of Chicago) and North Carolina were considered the most undervalued in the current survey.

As for product type, Retail Malls were rated highest based on market fundamentals and Industrial placed second. Suburban Office fell from the third spot in the winter survey to tie for last with Retail (non-mall) properties. Retail Malls finished as the most undervalued property type, followed by Urban Office and Retail, while Apartments finished as the most overvalued property type for the third straight survey.

The highest individual rating for a property type within a region was Industrial in the Mid-Atlantic region, while the least favored property types within a region were Retail in Phoenix and [Urban Office in Dallas.

Investment/Valuation Parameters/Geographic Regions

Near-term values appear to be increasing the most in Chicago, followed by a number of other regions, including Northern California, Southern California, Denver and New England, tied for second. The lowest near-term value increases are in Phoenix, which trails slightly behind Dallas and Atlanta.

In general, Mid-Atlantic, Northern California, New England and Seattle are attracting the greatest investor attention in this survey. Dallas and Phoenix fare the worst on investor attention, followed by Houston.