Given the events of the past few weeks, market prognosticators are holding back on forecasting what the economy will do. Too many variables exist in the dust of September 11 to predict–with even the dubious degree of certainty that existed during the summer–which way the fiscal cards will fall. But, as Darbin T. Skeans, president of the Chicago-based CCIM Institute, points out, through Q2 at least there are some very positive signs that should give the real estate community some cause for confidence. For instance, he quotes the newly released Investment Trends Quarterly from CCIM and Landauer Realty, which points out that cap rates are now the lowest they’ve been since 1995. It reflects what the industry’s pundits have been saying since the economy started its slip, that the development discipline displayed over the past few years is still serving as a bulwark against an industry slump. Skeans, a 28-year industry veteran who is also president of Imperial Realty in Allentown, PA, explains to what the upshot of the latest report means to the industry going forward. The results of the Q2 report seem to continue an investment trend that you’ve documented for several quarters now. What is the bottom line here?

Skeans: We were actually doing a little better than quarter two than in one. Certainly, people are looking at real estate as a solid place to put their money. With volatility in the stock market being what it is, real estate is a very good place. Vacancies are very low and building has been kept in check. Cap rates, according to the report, are at near-historic lows. Track them for us, please and explain what this means for investment trends.

Skeans: Average cap rates slipped from 9.8% in Q1 to 9.43% in Q2, which indicates a shortage–and therefore growing competition–for good properties, which pushes prices higher. The volume of dollars invested in commercial properties last quarter climbed 18.75%–to $14.4 billion. Going back a number of quarters now, markets across the country have been absorbing a great amount of space, and increasingly, tenants have not had a lot to look at. As a result, rents are going up and real estate as an investment is more attractive. Is the trend truer in certain geographic markets than in others?

Skeans: The Mid-Atlantic and the Southeast posted new quarterly highs in volume, with the Mid-Atlantic posting 38.2 % of total US investment dollars. But outside of these regions, most markets have also done very well with the exception of the Plains states, which lagged behind. What’s the bid-ask relationship now as compared to previous quarters?

Skeans: As I indicated, the second-quarter drop in cap rates indicates that prices have moved up, and I think sellers are pretty well able to get what they want in the office sector especially, where premiums are being paid and not too many options exist for investors. What about other product sectors?

Skeans: That’s holding true for just about all product sectors through the second quarter. We’ve discussed the market through the report period, in which, as you’ve indicated, the investment market was robust. How much did things change in September? Should conditions continue to be robust, or are there increased fears of a prolonged recession?

Skeans: Today, frankly, after September 11, there are more questions than answers. I was talking with a banker just a few days ago, and he indicated that he doesn’t know what the policy will be concerning interest rates, so right now they’re not giving quotes. They were 200 basis points above Libor, which means they would now be under 5%, and they’re not sure they can lend money at under 5%. At the same time, another banker has told me that they were at 200 above Libor and they were aggressive in their quotes. So it’s clear that at the very least, there is confusion in the market.

Concerning September 11, I should also note, in terms of fully tenanted buildings, that we’re feeling more pressure here in the Lehigh Valley since the attack. We’re 90 miles from New York City, and space is being taken up here. People have been relocating to this area for the past five or 10 years, and some companies that were on the fence are starting to look at us much more favorably. Don’t forget, a brand new building here rents for $19.50 per foot plus electric. To the best of your ability, can you give us a prediction through the first quarter of ’02?

Skeans: Any prediction now is difficult because no one has ever seen anything like this before. If it’s possible to look around the impact of September 11 for a minute, I think we’ll see a short-term blip after which–by the spring of next year–we should be growing again. Given the volatility of the stock market, where else can investors put their money? Interest rates are low, vacancies are down and there’s the reassurance of demographics. The number of baby boomers reaching peaks in their careers speaks well for both the office and multifamily sectors. These factors combined make me feel good about real estate in the long term.

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