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Industry Outlook -- FINANCE

REAL ESTATE

Folks in the real estate trade aren't accustomed to gentle business swings. Construction, sales, and leasing all tend to be subject to stomach-lurching fluctuations in demand. But if 1998 lives up to forecasts, real estate pros could start getting used to an easy ride.

Sales of existing single-family homes, likely to hit a record 4.19 million in 1997, will settle to 4.11 million in 1998, projects the National Association of Realtors. New home construction, off slightly at 1.46 million units in 1997, will slip again, to 1.39 million, according to the National Association of Home Builders. That's a 4.8% drop--but "modest" compared with past swings, says David Seiders, the association's chief economist.

Commercial real estate, too, is enjoying unusual stability. Industrial space, warehouses, and offices are "in equilibrium, with vacancy rates approaching 10%--just about where rents will remain stable," says Michael L. Evans, national director for E&Y Kenneth Leventhal Real Estate Group. Even where property values are soaring, analysts say new forms of finance should induce discipline and prevent the overbuilding that has triggered real estate busts.

This placid picture is the result of the healthy economy. Potential home buyers enjoy a triple play: Confidence boosted by strong hiring, investment gains fueled by the stock market, and mortgage rates close to 7% for 30-year fixed-rate loans. "When a consumer has no reservations about what the economy will do, he becomes a home buyer," says Realtors' economist Jason S. Altman. Even with the turmoil in Asia, this "sense of economic well-being" should last through 1998, Altman says. Trade-up homes and second houses should benefit as the median house price climbs 6.2%.

GO DOWNTOWN. The most lucrative markets for office developers will be "downtowns where construction of new space is limited, either by geography or zoning," says Matthew Banks, the CEO of New York-based real estate advisers ERE-Yarmouth. Seattle, New York, and Chicago join San Francisco and Boston as good investments, according to an ERE-Yarmouth investor survey.

Across the country, office construction is picking up: The McGraw-Hill Companies' F.W. Dodge Div. predicts developers will start work on 190 million square feet of office space in 1998, a 10% gain from 1997 and the highest activity level since 1989. Developers who once refused to break ground unless a new building was already leased are starting to build speculative properties, says John S. Renard, Western region president for real estate managers Cushman & Wakefield.

One sector that might hit choppy waters is retail. Overbuilding and changes in shopping habits have left a space glut at many malls. Otherwise, 1998 looks to be a year of uncommonly smooth sailing.By Mike McNamee in WashingtonReturn to top

TABLE

Prognosis 1998

POSITIVES

-- Low interest rates and strong consumer confidence are fueling home buying

-- Big employment gains are driving down office vacancy rates in the suburbs and downtowns

NEGATIVES

-- Shifting trends in retailing have produced an oversupply of mall

and shopping-center space

-- Apartments are overabundant, especially in the SunbeltReturn to top

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