Emerging Trends in Real Estate®
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2003EMERGING TRENDS IN REAL ESTATE® Emerging Trends in Real Estate Additional copies of Emerging Trends are is a registered trademark of available at $95 each from: PricewaterhouseCoopers LLP Lend Lease Real Estate Investments, Inc. Copyright © October 2002, 909 Third Avenue, New York, NY 10022. Lend Lease Real Estate Investments Attention: Emerging Trends and PricewaterhouseCoopers LLP or email requests to: All rights reserved. [email protected] PricewaterhouseCoopers LLP 1747 Veterans Highway, Suite 48, Islandia, NY 11722 or email requests to: [email protected] 71515 p1_3.QXD 10/4/02 6:40 PM Page 1 DIFFERENT WORLD, TEMPERED EXPECTATIONS Contents Foreword 1 Chapter 1 Different World, Tempered Expectations 2 Chapter 2 The Survey: Investment Trends 2003 14 Chapter 3 Capital Flows 22 Chapter 4 Markets to Watch 32 Chapter 5 Property Types in Perspective 44 Interview/Survey Participants 2003 58 71515 p1_3.QXD 10/4/02 6:40 PM Page 2 EDITORIAL BOARD Emerging Trends Chairs Patrick R. Leardo Fred N. Pratt, Jr. Editor/Author Jonathan D. Miller Editorial Board Lijian Chen Peter F. Korpacz M. Leanne Lachman Steven P. Laposa Jeanette Rice Robert K. Ruggles, III Susan M. Smith Paul Summer Dan Van Dyke Interviews and Surveys Conducted by PricewaterhouseCoopers Editorial Review and Production Cathie Bartels, Martha Althafer, Charlotte Decker, Donna Douglass, Ryan Dunlap, Caroline Green, Bernadette T. Korpacz, Marilyn Robson, Philip Thai, Bonnie White The editors would like to thank our colleagues for their time and insights: Wally Antoniewicz, Cristina C. Ampil, Dan Bajadek, Jerry Barag, Timothy Barnes, Mark Bratt, Scott Brown, Dick Burns, Nicholas Cammarano, Jr., John Cherry, Gene Conway, Frank Creamer, Mike Daly, Ray D’Ardenne, Mark Degner, Andrew Friedman, Bjorn Hanson, Peter Harned, Doug Healy, Michael Herman, Larry Hicks, Ed Hurley, Scott Janzen, Boyd Johnson, Richard Kalvoda, Ted Klinck, Richard Marchitelli, Hugh McWhinnie, Don Miller, Paul Mucci, Scott Oran, Alan Plush, Jon Rosen, Jim Ryan, David Solis-Cohen, Joe Thomas, Michael Torres, Steve Walker, Richard Wincot 71515 p1_3.QXD 10/4/02 6:40 PM Page 3 FOREWORD ommercial real estate investors watch nervously Don’t expect any sustained recovery before 2004 or 2005. as a sluggish economy offers scant relief from Its start should usher in a period of solid, unspectacular Cweakened supply/demand fundamentals. They performance that tracks traditional investing norms, with wonder whether the property markets are really a safe real estate nestling between stocks and bonds on the risk/ haven from the stock market cataclysm or simply the return spectrum. As investors become reconciled to more next asset class in line for major dislocation. Without down-to-earth returns — Wall Street’s unprecedented question, capital needs to raise its guard in the short decade-long bull run is over — income-oriented invest- term. History shows that increased flows to real estate in ments like real estate should look increasingly attractive. softened markets can mean problems for investors. So far, low interest rates have been a boon to owners, who’ve This consensus view is detailed throughout Emerging Trends, been able to refinance or leverage up returns. And the industry’s most respected outlook, now in its 24th year. development has cooled down, keeping supply under The forecast is published jointly by Lend Lease Real Estate reasonable control. But demand — especially for office Investments and PricewaterhouseCoopers. More than 170 space — has cratered in many markets and shows no industry experts — investors, developers, lenders, brokers, signs of ramping up quickly, absent a sudden rebound in research consultants — participated in the detailed corporate America. interview/survey process that once again forms the basis of Emerging Trends. PricewaterhouseCoopers conducts that For 2003, Emerging Trends in Real Estate forecasts a process and Lend Lease writes and produces the report. Both continuation of lackluster performance, as markets companies provide additional research and executive insights. struggle to escape from a relatively shallow, but extended, cyclical downturn. On a relative basis, real estate may All of us at PricewaterhouseCoopers and Lend Lease extend sustain returns that continue to beat stocks and bonds, our considerable appreciation to the respondents and but robust gains are not expected. Overall returns should interviewees. Their candid insights are responsible for hover in the mid to upper single digits; however, Emerging Trends’ unmatched track record for predicting commodity properties with vacancy problems could market movements over the years. 2003 promises to be a suffer serious declines, since capital will focus on choppy, maybe even challenging, period in the property premium, well-leased buildings with locked-in cash flows. markets. We hope this report helps guide your success through the year. PricewaterhouseCoopers LLP Lend Lease Real Estate Investments, Inc. October 4, 2002 71515 p2_13.QXD 10/3/02 8:35 PM Page 2 Chapter1 71515 p2_13.QXD 10/3/02 8:35 PM Page 3 DIFFERENT WORLD, TEMPERED EXPECTATIONS When plentiful capital cavorts in ith Emerging Trends forecasting an anemic rebound — a gradual upturn that should commercial real estate markets Wgain momentum in 2004-2005 — investors would do well to continue seeking quality properties with with eroding fundamentals, it’s locked-in income streams that will carry them through the market trough. Marginal properties in marginal locations time for more caution. Despite the could suffer material value declines, as capital and tenants steer clear. current proclivity to park money in After an unusually steep bust-boom trajectory in commercial real estate, the investment universe is reverting seemingly safe property harbors to the mean — the middle ground between the early ’90s recession and the late ’90s skyrocketing of the stock market. instead of the bloodied stock More recently, the vicious bear market in stock equities, collapse of the high-tech and telecom industries, and market, an ominous trio — rising ensuing corporate governance scandals have soured notions of easy money, early retirement, and carefree speculation. vacancies, declining rents, and Shock waves from September 11 have administered a long- overdue dose of reality for many Americans — security and mounting property expenses — order can’t be taken for granted in an increasingly complex and dangerous world, despite our country’s lone promises increasing pain in 2003. “superpower” status and dominating economy. “It’s a If the economy flounders, the year different world, and expectations are tempered.” For investors, the recent tumult has been a wake-up call to ahead will see a relatively concentrate once again on risk-adjusted returns and regain reasonable expectations about investment performance. shallow property-market downturn Ultimately, this renewed focus should reward real estate as a steadfast haven for solid, income-oriented returns, sitting prolonged and core portfolio appropriately between high-grade bonds and more volatile stocks on the risk/return spectrum. “Long-term returns for returns concentrated in the mid to core real estate should deliver about 5% (above inflation), and over the next five to seven years we should expect upper single digits (albeit safely total returns in the 7%-8% range,” predicts a leading real estate strategist. “That’s maybe not as dynamic as you in the black). might like, but there are coupons to clip, and in light of recent stock market experience, those returns will be quite nice indeed.” Emerging Trends in Real Estate 2003 3 71515 p2_13.QXD 10/3/02 8:35 PM Page 4 “WHEN YOU LOSE 35% ON YOUR STOCK PORTFOLIO, SINGLE-DIGIT REAL ESTATE RETURNS LOOK GOOD TODAY.” Controlled Capital Flows It’s not just window Completing a dressing: Scrutiny by the CMBS B-piece cartel, rating agencies, and Wall Street REIT analysts has actually Comeback imposed considerable restraint on lending activity and helped stanch unnecessary development. “Nobody’s acting Most indicators show real estate surviving a torpid 2003, to stupid — you can’t get away with it.” emerge with regained standing in the investment universe and greater structural stability. That’s assuming we avoid an Attractive Yields Apartments, 24-hour office, grocery- ugly double-dip recession or global maelstrom — read: war anchored retail, prime malls, and warehouses have proved in Iraq, cataclysmic terrorist strike, Middle East confla- they can deliver 7%-8% income consistently. gration, God knows what — in which case all bets are off for all investment categories. Positive Returns Most importantly, real estate appears to be surviving a cyclical downturn without major dislocation. Greater Structural Stability Recent REIT and The property sector is regaining a large measure of its pension fund dominance of the equity markets means the reputation as a reliable, less mercurial, bond-plus investment industry isn’t as leveraged as in the past, when private — an image severely damaged in the early-’90s market owners held sway. “Owners have more skin in the game,” depression. “When you lose 35% on your stock portfolio, and the public operating companies have brought greater single-digit real estate returns look good today.” sophistication to the job of understanding markets and managing investments. REITs, especially, tend to be agglomerators — buying and holding prime properties, 2003: More Risk, selling only weaker assets as necessary. “The industry’s capital