"We are about to talk ourselves into a recession. Interest rate cuts and tax cuts should help everyone's mindset," says former ULI chairman Smedes York, president of York Properties Inc. in Raleigh, NC. "My advice to developers is: Don't do as many projects. Supply needs to slow down."

The ULI forecast calls for two to three quarters of flat to 1.5% economic growth, to be followed by a gradual increase, resulting in an overall growth rate through mid-2002 of 2%. The forecast also includes a survey of some 230 real estate professionals showing that most expect profits to be "good or better." The strongest profitability is forecast for financial services and institutional investors, followed by public real estate operating companies and REITs.

Real estate service firms--especially economic consulting firms--are predicted to fare well, while private real estate operating companies will experience "modestly good" profits. Residential developers will weather the slowdown better than commercial developers, because of the continued strength of the housing market, the forecast says.

The office sector, which the ULI considers a key indicator for commercial real estate, is expected to slow considerably through the middle of next year. Current vacancy rates are low, and ULI researchers predict any slowdown in absorption of space will be at least partially offset by a decline in construction. Office properties will experience much more modest rent increases and returns through mid-2002, and in some markets, rents could be flat or even decline, according to the report. Nationwide, vacancy rates likely will rise moderately, but some markets will show sharp increases, including those with a high concentration of tech firms.

ULI survey participants voted Washington, DC as the "most favored" investment market, along with Boston and New York. All three markets have been tight, and that may protect them in the downturn. While Los Angeles and San Francisco also made it into the top five, uncertainty over California's energy crisis could hamper near-term development. San Francisco also was named to the list of the "least favored" city in which to invest.

Atlanta ranked highest among "markets to avoid" through mid-2002, along with Dallas, San Francisco, Houston and San Jose. "Areas to avoid have had significant increases in supply and not enough demand to absorb the supply in the pipeline. These areas are already seeing rising vacancy," the forecast says.