Real Estate Market Outlook

Industrial: The ongoing economic expansion is creating tenant demand across other property categories besides office space. The industrial vacancy rate fell by a robust 50 basis points, the largest quarterly decline in nearly 7 years, to end the first quarter at 8.9 percent. At the same time, the construction pipeline swelled to 88 million square feet, a 4 million-square-foot gain from the prior quarter. Look for the vacancy rate to continue falling, but at a slower pace in the second half of 2005, ending the year between 8 and 8.5 percent. Average rental rates may begin a gradual ascent toward year-end.

Retail: Shopping center leasing activity and rental rates have been very firm. Asking rental rates for prime inline shop space and premier urban retail space blew past expectations, averaging gains of 5 percent and 3.8 percent, respectively, over the past 12 months, while the average sales price for a 1-acre pad site in a top location increased by a robust 7.3 percent. Rising home prices have been a source of consumer spending as homeowners refinance their mortgages with cash-back or take out home equity loans. Stubbornly high oil prices have had a chilling effect, but it has been confined mostly to lower-income households and the recent performance of discount retailers. Despite slowly rising interest rates, consumer spending should remain strong as long as the economy continues to create jobs.

Hotels, Medical Offices, Other: Other property categories seeing high levels of demand include hotels, medical office buildings, and office condos. The hospitality market is in the midst of a robust expansion cycle fueled by increasing business travel and tourism, including foreign tourists visiting the United States at fire-sale prices - thanks to the depreciated dollar. Medical office buildings are benefiting from increasing demand for healthcare services created by the aging baby boom generation and biotech-fueled advancements in the medical industry. Office condos are enjoying a mini-boom spurred by the same low interest rates that encourage renters to become homeowners.

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