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BusinessWeek: January 10, 2000 |
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Industry Outlook 2000 -- Services
Real Estate
Blame the Fed's attempt to guide the economy to a soft landing. Following a succession of interest-rate hikes, the higher cost of financing will exert a dampening effect during 2000 on the rate-sensitive housing sector. And if the housing sector turns south, so will the construction industry, which just finished its eighth consecutive year of expansion. After four years of record gains, the value of new single-family and multifamily residential contracts in 2000 will drop 3%, to $184.8 billion, according to The McGraw-Hill Companies' F.W. Dodge Div. At the same time, housing starts will slide 7%, to 1.58 million units. Taking its cue from housing, the total value of all U.S. construction contracts will remain virtually flat at $429 billion. That compares with an 8% jump--to $426.8 billion--in 1999. The main culprit here is rising mortgage rates. The National Association of Home Builders estimates that the rate on 30-year fixed mortgages will climb to 7.9%, up from 7.4% in 1999. Still, measured against historical levels, mortgage rates are low, leaving room for optimism among some housing industry veterans. "As long as rates stay between 7% and 9%, we'll be O.K.," says William D. Albers, chief financial officer at Centex Homes, one of the nation's largest homebuilders. "If we go to double digits, we'll see some real slowing." As housing loses some of its momentum, there will be fewer homeowners outfitting their new digs. That means new-store building could drop by as much as 7%. Office construction may also tumble about 3.4%, as developers add just 280 million square feet of space. But to put that in perspective, the 290 million square feet added last year marked the highest level since 1986. Even as the market slows, however, industry executives say they are unlikely to get saddled with overcapacity, as occurred in boom-and-bust cycles past. While signs of overbuilding have appeared in some suburban office areas, like Atlanta and Dallas, inventories will remain surprisingly low in most areas. Industry execs "are more disciplined and more rational" than in the boom cycles of the 1980s, says John C. Goff, CEO of Crescent Real Estate Equities Co. Landlords may have a different view of the market. It's unlikely that they will be able to raise office rents in 2000 as much as they have in recent years. In 1999, for example, rents were up nearly 10% over 1998. This year, real estate services firm Cushman & Wakefield Inc. estimates that the increase will be closer to the 5%-to-7% range. In the industrial market, the picture may be the brightest. Warehouses will rock, thanks to the explosion in e-commerce. As labor shortages continue, storage space with built-in robotic retrieval and other high-tech amenities will command the highest price. "This is going to be a banner year for the Internet, and industrial [real estate] is going to be a big beneficiary," says Janice Stanton, Cushman & Wakefield's managing director of investment research. That's what Michael K. Berry, president of Dallas-based Hillwood Properties, is banking on. Hillwood, co-owner of the 14 million-square-foot Alliance industrial complex in the Dallas-Fort Worth area, is currently adding 500,000 square feet of speculative space, largely targeted at capturing what he calls the e-commerce fulfillment business. "At the end of the day, all of these new Internet ventures still need brick-and-mortar locations," he says. And that may well be the only bit of excitement the real estate industry gets in 2000. Return to top | |
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  Return to top TABLE Positives and Negatives POSITIVES -- Office construction in downtown markets starts to catch up with suburban construction. -- Industrial development benefits from e-commerce and global trade boom. -- Overbuilding in budget-priced hotel sector starts to subside. NEGATIVES -- Rising interest rates and sagging consumer confidence will slow the housing boom. -- Overbuilding hurts suburban office markets, particularly in the South. -- New-store construction also sags because of slowdown in retail sales . Return to top |
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