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Mid-year forecast by ULI a yawner

The Urban Land Institute's Real Estate Mid-year Forecast was just released and it reflected the general conclusion that the economy and the real estate markets would be in a "yawn" position, which is my term for "not bad -- not good."

The best sector was projected to be multifamily housing, with rent increases ranked from poor in the high-income levels to fair in the mid-ranges. Vacancies would begin dropping next year with a slowdown in new construction lasting through 2003.

The most favored overall investment markets are: Washington, D.C., New York, Los Angeles, Chicago and San Diego, with Denver and Phoenix making up the most dynamic markets. The least favored markets would be San Francisco, Atlanta, Dallas, Houston and Seattle.

San Diego's growing reputation for more people, more demand and less available land dominated everything else except the weather.

Nationally, the office market was considered a poor sector with no sign of a turnaround, with rising vacancies and very little new construction funded and authorized. This represents the usual fickleness of this sector, with the 9/11 event having hurt its near-future with unknown shock-waves still being reasoned out.

The industrial sector will continue to soften throughout the year and then stabilize in 2003, with new construction throughout that year. Warehousing will offer the best prospects, with research and development properties offering "modestly poor prospects," personified by Northern California.

Many retailers are "closing stores or failing while others will be postponing expansion" as this sector continues its rapid evolution. Neighborhood shopping centers (which I ranked the best sector last year) will perform most impressively. The poorest sectors will be entertainment, regional malls, and power centers, all offering "modestly poor prospects."

Hotels were the worst performing properties in 2001 and will be pretty much the same in this projection, with new construction remaining especially poor.

Single-family homes were the most robust category with a seeming "forever" projection as median pricing projected to continue upward. The sales rate for used homes looked as if it would set a new record, after a rather excellent previous year -- sad news for the deprived home shopper and renter. Being priced out looked like more of a national epidemic rather than a real estate condition.

Capital markets looked to continue to be more selective as underwriters want to make certain that they've calculated any market contingency. Money will be available but on an increasingly more costly and demanding basis. Lenders are nervously waiting for the "other shoe" to drop in the war on terrorism as fear and suspicion begin to dominate media coverage.

The only surprise to the ULI projections is that there are no surprises. The optimism that usually permeates builders' thinking is still to be found, while lenders hold the "itch factor" in place, carefully calibrating every request for financing -- looking for the "fuse" which might ignite, sending each marketplace downward. Equity is much less cautious, though I expect gold to turn to gold for a change, since it is the "language of catastrophe," as is terrorism, the new masked-man in the equation called real estate.

Goodkin is an international real estate adviser and strategist, and a housing analyst since 1956. He can be reached at sandy.goodkin@sddt.com.

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