When the real estate finance term “subprime” became an everyday headliner, the natural choice for the first topic of the 2007 Real Estate Conference was again Real Estate Market Trends—“What’s going on in the market?” With 44 years of experience in real estate appraisal, counseling, publication, and research, Peter F. Korpacz, the Executive Managing Director of Weiser Reality Advisors, brought his up-to-date market insights on economic and demographic market trends, real estate space and capital markets, and investment strategies.
Economic and Demographical Trends
While most macroeconomic indices look somewhat gloomy, Mr. Korpacz still sees hope in the longer term, based on a solid real estate fundamental: growing U.S. demographics. Though not improved, GDP growth and unemployment trends have not indicated obvious recession either. However, the latent risk of a subprime mess finally triggered a liquidity crisis in early August and shut down the entire CMBS market. In particular, the subprime crisis expedited the downward trend of an already cooling-down housing industry. Mr. Korpacz explained that the short-term economic trend, which is strongly influenced by consumer and business confidence, has been hurt by the recent housing-value decline. But the recent interest rate cuts and global growth story have bolstered the overall confidence level and he expects that the most likely scenario is a soft landing or mild recession.
In light of such market uncertainty, Mr. Korpacz urged a return to real estate 101: where there are people, there should be real estate. Different from most other developed countries, the U.S. still keeps its population growing. Larger in size than the previous, “baby boom,” generation (born around 1946-1964), the new, “echo boom,” generation (born around 1977-1997) is now ready to take over the major real estate demand power and Mr. Korpacz sees capturing their social and residential lifestyle as the key to success in the next real estate cycle.
Real Estate Space and Capital Markets
Mr. Korpacz examined the real estate space and capital markets by providing a detailed outlook on five real estate market sectors. First, in the office market, he expects the recent supply surplus to be fully absorbed over the next three years with its cap rate stabilizing and vacancy rate remaining within the approximate range of 12 to 14 percent. In the industrial market, even though pricing recently reached record highs, the supply and demand will match up well for next three years and will result in flat vacancy rates. As for the apartment market, volume is slowly trending down as the cap rate remains flat. However, the vacancy rate is still healthy at around five percent and Mr. Korpacz expects it will remain flat for the next three years. In the retail market, because of the sharp increase in supply during the past four years, the vacancy rate increased from 7.0 to 9.3 percent. However, the cap rate has compressed for the past two years and the overall market outlook for next three years is stable and good. Lastly, in the hotel market, in spite of the sharp jump in per-unit prices over the last two years, the cap rate is now stabilizing and for the next three years the market is expected to see a mild supply surplus.
Mr. Korpacz’s interpretation and advice for the current real estate market trend sum up as follows: (i) it’s a slowdown, not a meltdown—a soft landing or mild recession is more likely; and (ii) “globalization” is the next key theme for real estate investments, so read it quickly and act on it now.
In this slowing market, investors need to get defensive unless they can be opportunistic and have deep pockets. He advised to hold onto the best properties in the portfolio and focus more on asset management to retain the best tenants and to work on lowering expenses. On the globalization front, as more and more manufacturing jobs have shifted from the U.S. to emerging nations, brainpower and service industries are driving domestic employment growth. People in those industries prefer an urban, 24-hour environment in cities or suburbs. Therefore, the gateway cities on the East and West Coasts—New York, Los Angeles, Seattle, San Francisco, San Diego, San Jose, etc.—are to be the targets for the next investment cycle. All in all, Mr. Korpacz sees that real estate is still well positioned to ride out the storm and closed his presentation by saying, “stay confident in real estate and keep your eyes open for upcoming real estate investment opportunities.”