Property performance will vary by region & type

Real Estate Weekly, Feb 16, 1994

Expectations for office, industrial, retail and multi-family real estate in 1994 will vary not very much from those in 1993, notes a new report from Balcor Consulting Group, Inc., a division of Skokie, Ill.-based The Balcor Company, one of the country's largest real estate owners and investors.

Data for the 1994 Real Estate Outlook was provided by a variety of secondary sources and Allegiance Realty Group, the sixth-largest property management company in the United States, and a wholly-owned subsidiary of The Balcor Company.

In addition, the 1994 Real Estate Outlook contains a review of trends and projections for the mini-storage market, based on a recent in-depth study of this industry by Balcor Consulting Group, Inc.

National Economic Trends

The nation's gross domestic product is projected to post its third straight year of moderate, yet gradually increasing real growth, with the longer term outlook being more of the same.

Inflation has ranged between 3 and 5 percent since 1985, and is projected to record its third straight annual increase of approximately 3 percent in i994.

Corporate layoffs are expected to continue as the nation enters an era of slow growth, moderate inflation, and international competition which require companies in all industries to be the lowest cost and highest quality producers.

In 1993, as total employment increased by 1.5 percent, corporate layoffs increased by 20 percent over their 199 1 levels. These seemingly incongruous trends are reconciled by growth in employment by firms with less than 100 employees.

Service-related businesses are expected to continue to lead all industries in employment growth for 1994. Office employment will rebound and surpass total employment growth of 1.9 percent in 1994.

The fastest-growing industries for 1994 are: legal services, accounting, business support, transportation, construction, advertising and health services.

Despite low inflation, retail sales are projected to post another increase in 1994, and continued low interest rates will bolster durable goods sales. Consumer confidence is expected to gradually improve _throughout 1994 in response to generally favorable economic conditions.

Regional Economic Trends

The mountain states, particularly Arizona, Nevada, and Utah, have captured new investment due to the economic difficulties and social problems in California, where business costs are 16 percent above the national average and are significantly higher than surrounding states, such as Arizona and Colorado (13 percent below the national average) and Utah (34 percent below the national average).

The Florida economy continues to be driven by tourism and immigration (primarily retirees) despite recent crime problems.

The South Atlantic states of Georgia, South Carolina and North Carolina continue to fare well with a variety of industries including banking (Charlore), research and development (Raleigh-Durham) and manufacturing (South Carolina).

Atlanta is the fastest growing major metropolitan area in the country due to its position as capital of the South Atlantic region and the development related to the 1996 Olympics.

The most troubled region remains California, particularly the Los Angeles metropolitan area, where overbuilding, defense cutbacks, Japanese disinvestment, high business and living costs, and social unrest hamper growth.

Below average projections for Kentucky, Ohio, and Michigan, are related to their dependence upon the automotive industry. However, strong automotive sales and the passage of NAFTA could result in better than projected results.

The below average to average growth projections for Texas, Louisiana, and Oklahoma are heavily influenced by low oil prices; however, several areas in Texas are outperforming the rest of the country.

In contrast to their state trends, watch out for strong local markets such as Columbus, Ohio and Austin, Texas, which are bolstered by universities, state governments, and strong manufacturing bases.

Capital Sources

While the economic recovery is projected to proceed along at a moderate pace, dynamic_changes are taking place in the capital markets. In short, capital is now available and the supply will continue to expand in 1994.

Real estate investment trusts (REITs) made a huge comeback in 1993. As ot November 1993, approximately $2.8 billion had been raised by existing REITs, and $6.3 billion had been raised by 34 REIT initial public offerings (IPOs).

The main question for REITs is when the bubble will burst, not if. Until recently, stockholders were treated to annual returns averaging over 30 percent. However, the large number of IPOs, combined with a slight upward movement of interest rates have already created problems for these stocks, which dropped 2.5 percent in value in October of 1993.

In 1994, REITs will be hard-pressed to achieve the outstanding returns they had in 1993. Moreover, any sharp upturn in interest rates or stock market correction could seriously damage REIT yields and investor interest.

Besides REITs, Wall Street has been actively bringing capital to the commercial real estate market in the form of mortgage-backed securities. The RTC dominated the securitization market in 1991 and 1992, and, most importantly infused this industry with the capital to establish a viable infrastructure of underwriting, structuring, placement and subordination.