Kenneth Riggs of RERC

GlobeSt.com: Your ultimate conclusion is that the economy and the real estate sector are parting company in terms of recovery?

Riggs Yes. We're still working through the economic slowdown that started a year ago. And while we're starting to see some strength in the economy, companies are still downsizing and struggling with their profits--which obviously affect their space decisions. The result is the huge amount of sublease space on the market.

GlobeSt.com: But that sublease space is old news.

Riggs Yes, but it continues, particularly in the office market. In the fourth quarter we saw some of the highest vacancy increases ever recorded, and it continues to increase. Demand is still extremely weak.

GlobeSt.com: Weaker than you would have expected at this point in the economic cycle?

Riggs Yes. People didn't anticipate exactly how much difficulty companies are going through. Indirectly, the reporting accountability and the transparency of the balance sheet are both part of the problem. That's why AOL/Time Warner recently had the biggest write-down in corporate history, and it had a hand as well in Tyco and Enron's performance problems. Transparency and clarity impact the balance sheets of those companies, which impact earnings, which translate into space need. So expectations have to be realigned because profits are not returning to those companies as quickly as hoped.

GlobeSt.com: So reporting transparency, which has been heralded as the greatest change in the real estate industry in the past decade, is also negatively impacting its recovery?

Riggs There's no doubt that the transparency of the real estate industry is its greatest asset. But yes, in different fashions, it is having both a positive and negative effect on the real estate recovery.

GlobeSt.com: Your report says that retail and hotel have the strongest investment opportunities. Yet their performance has been in serious question in the past few months. The only way is up?

Riggs They're showing the greatest amount of real improvement. Hotels, especially since Sept. 11, and retail over the past three to five years have been under a great cloud of uncertainty. People believe they've hit bottom now and, compared to other markets, show the greatest chance of upside. There's a lot of capital in the market but not a lot of opportunity. As a result, investors are starting to turn to hotels and retail.

GlobeSt.com: The flip side of that are the industrial and apartment markets, which have been considered the safest bets during the lag time. You're saying they're losing steam?

Riggs I'm saying that investors rate them as the safest investments in the market, but their relative ranking has declined due to the fact that their prospects are not as strong. Prices were bid up very aggressively up to a year ago, and they are always tightly priced within a relatively narrow bid/ask range. So the prospect of price appreciation is much less than a year ago.

GlobeSt.com: What is the office outlook?

Riggs Obviously demand is weak for both CBD and suburban space, although the renaissance for CBDs will continue once the economy picks up again, and the real risk will occur in suburban spaces. In the short term, however, both are tied to what happens to the economy.

GlobeSt.com: But what about the employment picture? Won't that speak well for the short-term recovery?

Riggs We continue to get mixed information on the employment picture, but the outlook for the next year will be very challenging. It's going to be a long road ahead for both the recovery in general and the real state sector in particular.

Email Kenneth P. Riggs Jr.