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News & Events

Real estate still sizzles but may fizzle

Keynote speaker at Kellogg conference predicts market cool-off

By Ed Finkel

10/19/2005 - 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, choose to do something else,” Rose said. “It's really good. 2006 will be better than 2005.”

After that, however, the winds of change will blow again, he said. Those with any interest in selling properties should think seriously about it in advance of this downturn, while those in the market for the long-term should brace themselves for the down cycle later in the decade, Rose said.

“There has never been an investment cycle where the music hasn't stopped and some people haven't gotten badly hurt,” he said. “This is a wonderful time to sell. You can't go wrong.”

Panelists who covered trends in retail and restaurant development agreed that the upward cycle of the past several 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 Next realty LLC.

But theaters are often the engine that drives foot traffic into such projects, he said, and if a town doesn't build one, an adjacent town might — and that means the first municipality “lose[s] the opportunity to have that unique asset.”

“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 various entertainment and retail “pieces” in such developments all want to know with whom they will be located, said Stanley Nitzberg, partner with Mid-America Investment Group.

“We tell each of the components that the other is going [to participate],” he said. “You'd be surprised how many people don't call each other. You do build some momentum.”

But that scenario “has the possibility of imploding” because leases often have co-tenancy clauses that mean if one merchant in a development leaves, a “domino effect” ensues, Glickman said. “It's a balancing act,” he said. “It's frustrating, but it's the world we live in.”