Photo: In the summer of this year, the average price for singlefamily homes in Washington D.C. has fallen for the first time. With this, the residential real estate market has reached its highpoint after five booming years.

In the office market, investors that are priced out of coastal markets continue to turn further inland, causing capital to flow into secondary and tertiary markets. Properties are most popular where old lease agreements are due for extension at much higher prices. “Improving rents and occupancies are becoming the primary price drivers,” says Patricia A. Nooney, Managing Director of CB Richard Ellis in St. Louis. In terms of volume, Manhattan and California remain the most consistently active investment markets. “But while the pace of sales is starting to slow,” says Patricia A. Nooney, “it is unlikely the trend will drop off substantially this year.” Office supply, meanwhile, is starting to grow at a lesser rate. Exceptions include the “Sunbelt”, which continues to gain popularity with both the general population as well as with investors and corporations.

Retail real estate still “on the top”
Retail, the darling of the 2005 investment community, continues to thrive due to relocations of pension funds into real estate. “As long as this steady flow of capital is available —and it appears it will be for at least another 18 to 24 months—retail investment demand should remain strong,” says Stephen Williamson, Director of Retail Services at Transwestern Commercial Services in Dallas. The downside here is that during the last 12 months, construction costs have increased 30 to 35 percent, causing new retail space for 2006 to drop. Big box supermarket chains like Wal-Mart, Target, Best Buy and Home Depot are still the biggest drivers of new retail developments. According to Stephen Williamson, the remainder of this year should continue to be very favorable for the retail sector. Lease rates as well as occupancy will show modest growth.

The market for industrial property is cooling down as well, with pockets of further growth. In cities like Austin, Boston, Atlanta and Baltimore the availability of space is rising. However, there are still cities where demand outpaces supply, like Tampa, Palm Beach and Las Vegas. At commercial ports like Long Beach and Portland “the demand for industrial warehouse space remains at a fever pitch,” says Patricia A. Nooney. According to her, the most active markets are currently Dallas, Seattle and San Jose.

Demand for new business ideas
Increasingly, realtors and developers have to go an extra mile to lure buyers to active properties. In early summer, Triangle Development sent out bright yellow postcards promising a free two-year lease on a Chevy Trailblazer with the purchase of a new condominium in one of their developments. Online auctions are thriving, because it has become much more difficult and time consuming to lure buyers. More often than before developers and realtors are buying value-added properties they are trying to reposition for a higher price. The Advance Realty Group in Bedminster, New Jersey, is acquiring raw land, shepherding it through local permitting processes and selling the land to developers. The Equis Corp., operating out of Chicago as a tenant representation firm, is helping government branches and universities identify parking garages and sports arenas for sale-leasebacks and other capital enhancing deals. “The big strategy today is to create income streams, not buy them,” says Josh Scoville, Director of Strategic Research at Property & Portfolio in Boston. “The most common approach to growing net operating income is to buy poorly occupied or vacant properties and attempt to fill the space with tenants,” he says. This is a classical substitution strategy in an environment with rising rates and lower returns. “Value-added acquisitions account for almost one-third of recent office transactions,” says Bob White, President of Real Capital Analytics in New York.

Since GDP growth halved to 2.5 percent in the second quarter, many experts are now trying to determine how a cooling real estate market can ripple across the economy. In the words of Federal Reserve Chairman Ben Bernanke, the impact will be “orderly”. Analysts at Merrill Lynch expect that the lower numbers in homebuilding could deduct a percentage point from the overall gross domestic product in the third quarter of the year. “We don’t think it’s going to be a disaster; it’s just going to be bad,” says David Wyss, Chief Economist at Standard & Poor’s in New York.