SAN FRANCISCO- Real estate investors’ outlook for the industry in 2004 ranges from “cautiously pessimistic” to “at best, less sanguine,” according to an annual survey of industry executives by the Urban Land Institute and PricewaterhouseCoopers LLP.

Based on surveys and interviews with more than 350 industry executives, Emerging Trends in Real Estate 2004 respondents widely regard next year as a “transition” period, as markets move toward a weak recovery thanks to an increase in corporate outsourcing of jobs overseas, a lack of US job generators and fiscal woes at all levels of government.

First distributed late last week at the ULI’s fall meeting here, the report found, as expected, weak market fundamentals, including high vacancy rates, falling rents, resurgent concessions, rising property taxes and higher operating expenses. And if interest rates rise too quickly before job growth drives up leasing activity, the report found investors expect property values would fall even further as the economic recovery gathers steam.

“No one expects a sudden rebound–-rents will be flat in most sectors, down more for office. Income returns carry the day, appreciation will be negligible and many office markets will experience value dips or worse,” according to the report. “Retail returns will moderate, warehouses, apartments and hotels show slight improvements. Capital flows remain plentiful, but will diminish as an improving stock market draws attention away (from real estate.) Defaults and delinquencies will increase modestly, again office markets will be the most troubled.”

The jobless nature of the recovery was interviewees’ leading concern. “Real estate markets need corporations to expand their US workforces to fill empty office space, increase production and distribution benefiting warehouses, and step up business travel to lift hotels,” according to the report. “Additional wage earners, cashing bigger paychecks, (will) rent more apartments and spend more in malls. That hasn’t been happening.”

Part of the problem is that some of the job growth that is occurring at corporations is happening overseas. “It was one thing to move a back office to the suburbs in the 80s or send a call center to Sioux Falls in the 90s,” said one interviewee. “It’s quite another to move an accounting operation to Banglahor.”

In its “markets to watch” category, only Washington, DC was selected as a still-promising investment market. New York and the Southern California region from San Diego to Los Angeles also received some accolades. “After that-–‘ugh,’” states the report. Other cities cited-–either because their real estate markets are improving or because they are potential bargain bins–-included Chicago, San Francisco, Seattle, Philadelphia, Phoenix, Houston, Denver, Atlanta and Dallas.

In terms of overall real estate capital availability, most survey respondents said investment funds will remain plentiful, but they expect some capital likely will be diverted to the stock market in 2004. Indeed, 52%of the participants predict stocks will outperform real estate, but 95% believe real estate returns will exceed those for bonds. “Real estate is an alternative investment category, not an asset class,” said one respondent. “If the stock market looks good, money will move out.”

Regarding development opportunities, the report notes that most “mainstream” development should be placed on hold or severely scaled back, due to oversupply in nearly all sectors. “For 2004, developers have two choices-–go to the beach or play golf,” said one interviewee.

The few exceptions: for-sale housing in infill locations, which scored high interest due to Downtown migration by singles and empty nesters, as well as tighter growth controls in outlying areas; low- and moderate-income apartments in close-in areas to help fill the need for affordable housing; brownfield restoration, now considered less risky than in the past, and which offers good prospects for town center housing; and master-planned communities with open space and pedestrian-friendly design.

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