Consumer spending continues to be the engine that drives the economy, but Nicholas Buss, Ph.D., senior vice president of PNC Real Estate Finance cautions that several factors, including consumer debt, could cloud the picture this year. "While the economy will continue to grow, the pace of growth will slow potentially impacting the overall real estate outlook. The risks include rising energy prices, a cooling of the red-hot housing market, an over- stretched consumer sector and an over-reliance on foreign investment," Buss said.
The more economy-driven sectors - office, industrial, and hotel - should be the best performers, while the consumer-driven sectors - retail, apartment, for-sale housing - will face more turbulence, according to Buss.
These findings are included in PNC Real Estate Finance's annual forecast, the 2006 Real Estate Outlook.
The office segment could gain the most ground in 2006 with job growth driving the need for companies to lease additional space, according to Buss. The apartment sector will see improvement in leasing fundamentals and Buss forecasts that market conditions will tighten to the point where landlords will be able to see the ability to slowly raise rents once again. While a good year should be in store for the industrial sector, the primary risk remains the impact of on-going restructuring within the domestic auto industry.
Commercial real estate will continue to benefit from a strong influx of capital. "The investors' love affair with real estate is still very much alive, but the risk is that too can quickly change," said Buss.
New construction across all sectors continues to be impacted by rising demand for construction materials overseas - particularly from China and India. In addition to overseas demand, U.S. developers are challenged by significant domestic demand for materials for rebuilding efforts in the hurricane-ravaged Gulf Coast.
Highlights from the 2006 Real Estate Industry Outlook include by sector:
* Office: For the first time in five years the office sector could move to the front of the pack. On-going recovery should ensure that investors will remain focused on this sector keeping prices high and yields low. Buss forecasts a measured improvement in fundamentals, with the national vacancy rate falling into the mid-13 percent range by year-end, demand continuing to outpace new supply, and real rental rate growth becoming a more realistic option in a growing number of markets.
* Retail: Consumers face challenges from a number of different directions, yet it is tough to bet against them as a growing national economy, job growth and rising incomes will serve as a partial wind shield. Landlords and retailers must remain focused and flexible, having a game plan prepared and ready to implement if the market slows and consumers pull back.
* Hotel: The hotel sector should continue its steady pace of improvement - making it three years in a row of strengthening fundamentals. Uncertainty surrounding energy prices and the impact of a pull back in consumer spending on leisure travel top the list of concerns. Counter-balancing these will be the strengthening national economy and a healthier business sector supporting travel. Buss predicts room-night demand growth in the 3 percent range, enough to push occupancy higher to 64 percent.
* Industrial: The primary risk here remains the impact of on-going restructuring within the domestic auto industry, but it likely will not be enough to offset the positive influences of other areas of the economy, most notably trade flows. Buss expects the industrial vacancy rate to fall to the 8.5 percent range by the end of the year, however developers will respond to tighter markets and more widespread rent growth.
