PALO ALTO, CA-Last month’s terrorist attacks will not have a long-term impact on the attractiveness of real estate investments even though it will worsen the economic downturn over the next several months, a special report by one of the nation’s leading investment brokerage firms says.

Though the US will go through a mild recession, the Federal Reserve Board’s long string of interest-rate cuts–including the half-point reduction announced earlier this week–will combine with other factors to trigger a robust rebound in 2002, according to the report by Marcus & Millichap Real Estate Investment Brokerage Co. The Palo Alto, CA-based firm provided an exclusive copy of the report to before releasing it to the rest of the media.

“At this point, no structural or fundamental causes have emerged to undermine the long-term favorable potential of real estate investments,” says Harvey E. Green, Marcus & Millichap’s president and CEO. “The investment real estate industry is better positioned to weather the current mild recession than in the 1990-91 recession due to stronger real estate supply/demand fundamentals, a more balanced market and ample liquidity.”

Further, says Green, the Federal Reserve’s interest-rate cuts–along with the tax-refund checks being mailed to consumers now–will keep the recession from becoming too severe and set the table for a strong economic rebound in 2002. Other key findings of the report:

  • Many markets and specific property sectors are feeling the pinch from the downturn, particularly cities with large airline, travel and entertainment-related employment bases. But US real estate will continue to be viewed as a safe haven for investors around the world, and the stock market’s volatility will make real estate an even more popular long-term investment option.
  • Though investors and lenders will be more cautious, no widespread credit crunch will materialize. “Capital is still available and improved real estate and banking industry fundamentals since the last [1990s] downturn will support transaction activity,” the report says, though second-tier transactions will be harder to finance and underwriting standards may continue to tighten.
  • Investor spreads have moved higher as Treasury yields moved lower since the Sept. 11 events, but they’re starting to drift back toward pre-attack levels. Spreads in CMBS product are up about 10 basis points for multifamily and mobile-home projects, and 15 basis points for office, industrial and retail developments. Hotel spreads are 20 basis points higher.
  • In most markets, apartments will remain the top choice for investors because they offer the most favorable risk-return balance. They’ll be followed by single-tenant net-lease properties with strong credit tenants, grocery/drug-anchored neighborhood and community centers, and standard industrial facilities with long-term leases.

    The report also says “it will be some time” before the New York and New Jersey office markets return to normal. An estimated 25 million sf of office space was destroyed or otherwise rendered non-functional after the attack, representing about 8% of the market’s inventory, Marcus & Millichap says.

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