One reason for the sober assessment is the employment picture. The US economy lost 2.7 million jobs between February 2001 and July 2003, according to the report.
"That's been quite devastating," RERC CEO and managing principal Kenneth P. Riggs Jr. tells GlobeSt.com. "But we expect this to be the brightest year for real estate on the demand side, because even though we're in an extended jobless recovery, we'll add 1.8 million to two million jobs."
That will translate in demand for more office space, and to a lesser extent, industrial space. More households will be formed, which should help the multifamily sector. Meanwhile, consumer spending seems to have carried the economy from recession to expansion.
Still, returns are likely to be lower, in large part because "irrational exuberance" is not expected to make a quick return on Wall Street. Real estate returns tend to be somewhere between stock and bond returns, Riggs says, and the stock market is expected to generate returns in the single digits.
"There is a better maturity in the market in pricing risk and return," Riggs adds. "That is the biggest challenge the industry will have going forward."
Meanwhile, investors are expecting 10.6% returns from real estate, according to the 2004 forecast. They could be disappointed, just as opportunistic investors have been waiting for distress sales.
However, Principal Real Estate Investors president and chief investment officer Randall C. Mundt expects commercial mortgage foreclosures and delinquencies to increase.
"I don't believe the pain will get anywhere near where it was in the late 1980s and early 1990s," Mundt tells GlobeSt.com. "At some point, borrowers will stop writing checks. What will probably trigger it is, you have a lot of loans out there where the debt service coverage is below break-even. What will trigger [default] is finding a tenant, and then not having the cash to put them into the building."
Mundt predicts there will be more restructurings and modifications by first-mortgage holders. Foreclosures could occur at the mezzanine level, with those lenders ending up with the property.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to asset-and-logo-licensing@alm.com. For more inforrmation visit Asset & Logo Licensing.