© Nathan Mandell Mark Rose

Real estate sizzles, may fizzle, Conference Keynote says

by Ed Finkel

The current real estate market will peak in 2006 and begin a downward slide within two to four years, predicted Mark Rose, CEO of Grubb and Ellis, and a keynote speaker at the 10th Kellogg School Real Estate Conference, held Oct. 19 at the James L. Allen Center.

With a strong economy and low interest rates and inflation, the market continues humming with the exception of some softness in the office sector and in apartment rentals, Rose said. The hotel market is particularly "white hot" now because few new hotels have been constructed since Sept. 11, 2001, but business travel is finally rebounding, he said.

"If you are currently in the real estate market and you are not making money, do something else," Rose added.

Those in the market for the long-term should brace themselves for the down cycle later in the decade, Rose said.

Panelists who covered trends in retail and restaurant development agreed that the upward cycle of recent years has led to a boom in publicly subsidized, mixed-use retail and entertainment development in downtown areas.

"Retail is entertainment," said panel moderator Richard Tucker, CEO of Tucker Development Corp. "They have to go hand-in-hand to make it a successful development."

Government subsidized projects contain a "mess" of requirements such as tenant commitments, environmental impact studies and traffic studies, but they pay well and are ultimately worthwhile, said Ross Glickman, CEO of Urban Retail Properties.

"It's not for the faint of heart," he said. "It is arduous. It is time-consuming. And it is not inexpensive."

Mixed-use developments that center around a movie theater need subsidies because a theater costs about $1 million per screen and only returns $600,000 to $700,000, said panelist Barry Schain, principal with Nextrealty LLC.

But theaters are often the engine that drives foot traffic into such projects, he said.

"You try to rationalize, 'Is it worthwhile to put in the theater space?'" Glickman said. "For the most part, you win. But it's pretty dicey," depending heavily upon how significant movie revenues are.

The complexity of the market, including challenges related to negotiating co-tenancy clauses in leases, require professional fortitude, indicated Glickman.

"It's frustrating, but it's the world we live in," he said.