Prognostication

GRADING PROGNOSTICATION:  The purpose of this web site is to provide decision-making information to users as to economic indicators relative to the real estate market.  Of course, markets in the US vary, but the following are generalizations as to the broad US real estate markets.  There are economic indicators noted in our site that provide more details and more data.

On a regular basis, a "grading” conclusion by those involved in the Research Center ("Center") should be undertaken as to performance of the economy in various sectors of the real estate market and as to related issues.

            The grading scale for performance of the economy relative to the real estate market utilizes the following grading letters and percentages:

            LEVINE REPORT CARD:

            GRADE:          RANGE:                                              PERCENTAGE:

            A         =          "Superior," great shape                     90% and up

            B         =          "Above Average," good shape          89%-80%

            C         =          "Average," O.K.                                79%-70%

            D         =          "Below Average," poor shape            69%-60%

            F          =          "Failed," troubled areas                     59%-down

            Further, gradations within these areas will be indicated by a plus (+) sign for a higher grade, such as B+ (meaning higher than just "Above Average" or better than just "good" shape).

            To the contrary, a minus sign (-) indicates below the level of that letter, such as a B- (indicating somewhat below than just "good” shape).

                                                                REPORT CARD:

                                       BURNS REAL ESTATE RESEARCH CENTER

            Our last Report Card indicated many factors that create concern for our local economy, as well as for the national and international  economies. We are flooded with many interacting economic, cultural, political and social issues. 

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            One can examine the “parry-and-thrust” of the POSITIVE and NEGATIVE arguments within the economy, including arguments focusing on medical costs, Social Security, retirement funds, cost of oil, trade deficit, monetary and fiscal deficits, housing issues, currency concerns, war, terrorism, other conflicts, threats of nuclear positions, major negative natural events (Katrina, Rita, Wilma Hurricanes; earthquakes, etc.) and many other events.  Mixed signals are coming forth, thereby confusing sophisticated investors as well as, and most certainly, the novice investor.  Confusion abounds.  Inconsistent economic signals create problems when making investment decisions.

            This means for many that money will remain on the sidelines, pending a clear, consistent direction that does not constantly result in an upside-downside viewing of the marketplace.  As for now, many viewing the market consider that the only consistency in the market is inconsistency.

            What is clear is that we are not clear.  No one is quite certain of the ultimate position as to the housing market.  The implications to a crash (or no crash) or a bursting bubble in the housing market are massive for the entire U.S. economy.

            As most economists note, there is little doubt that the economy would be in an extremely difficult position, far below the current posture, were it not for low interest rates currently enjoyed in many sectors of our economy.

            Although the housing market has generally remained strong throughout the U.S., current figures indicate that those numbers are changing –with a slowing of homes sales and a decline, in some markets of the average price of housing.

            Many leading U.S. economists are predicting about 3.5% to 4% Gross Domestic Product (GDP) growth for 2005.  Although housing prices are strong in many areas, there is some concern with an overbuilt position.  However, this does not mean that prices are ready to crash.

            With limited opportunities to invest in other areas for a favorable return, low interest rates, and consumer confidence, fairly high (even though it has varied somewhat in the last few months), at least speaking relative to the United States, overall, it is likely that the larger housing market, on a macro basis, will remain fairly strong for 2005.  Nevertheless, certain markets remain somewhat weak, or are weakening. 

            On the commercial side, it is incongruous to see that the Net Operating Income (NOI) has been dropping in many markets, yet sales prices have been increasing in those same markets with various types of commercial property.  In other words, the capitalization rate has been dropping with the income also dropping.  This inconsistent position can be explained in part by the low interest rates, positive attitude for appreciation, and lack of alternatives to place money, from an investment standpoint.  Where 8% might not have been an acceptable return two years ago for commercial real estate, whether that be for office buildings, retail, industrial or otherwise, 8% is now an acceptable rate, and even a rate sought after in many markets today, especially given the lower returns in the bond market.

            If the appreciation in real estate does not materialize, if interest rates increase rapidly, and/or if other non-real estate alternatives are available for investments, such as the stock market, one will most likely see a termination of the inconsistent behavior noted (NOI dropping and cap rates dropping), and a return to a more routine, fundamental, and historically acceptable relationship of capitalization rates and Net Operating Income (NOI).

            Most retail investment real estate rates continue to be tied to a (strong or weak) job market position.  If jobs are plentiful and at favorable compensation rates, there is more opportunity for consumption.  Jobs drive the marketplace in both commercial and residential real estate.

             Uncertainty appears to be the outlook, especially considering the recent events on the political side, with Mr. Libby, et al, and the need to find a new USSC Justice.  Uncertainty normally does not strengthen most investment markets.

                                                            G R A D I N G:

            The grading for the market, succinctly stated in the following areas, might be considered to be:

GRADE:

A-        SINGLE FAMILY HOMES: Although sales of single-family homes have slowed in some of the higher-priced homes, the market is strong and continues to be strong in many areas throughout the United States.  There are weaker pockets of some housing in U.S. markets.

C+       MULTI-UNIT RESIDENTIAL PROPERTY:  Vacancy rates have increased in many areas, but other areas are seeing a leveling out, or even a slight dip in vacancy rates.  It is anticipated that these rates will continue to drop in many markets in 2005.  If interest rates continue to rise, the affordability index for home purchases will fall – as has been the case in the last few months. This means apartment vacancies should drop somewhat.

C+       OFFICES:  Although improving in some markets, Offices in many Metropolitan Areas have larger inventories and higher vacancy rates than most investors would like to see. 

B+       RETAIL/SHOPPING CENTERS:  Retail space seems to be surprisingly resilient.  However, Consumer confidence remains one of the big keys to success in this area.

B         INDUSTRIAL/WAREHOUSES:  Industrial/warehouse space seems to show a reasonable pattern of occupancy.  Although some pockets have increased vacancies, occupancy seems to be holding.

C+       HOTELS/MOTELS:  Hotel and motel vacancy rates are dropping somewhat. However, this is still not a strong market.  Recovery will take some time in this area of the investment field.

C+       SPECIAL-USE PROPERTY:  Other special-use properties, such as in resort areas, continue to be reasonably supported as a result of some increasing consumer confidence.  However, it is a tenuous area, given general, volatile consumer confidence as well as overbuilding in some areas.  Therefore, this area remains of concern in 2005.

A-        FINANCING RATES:  Lower interest rates remain strong and favorable, despite a slight increase in interest rates.  Affordability continues to drop as housing prices increase and rates move up.

A-        REFINANCING RATES:  Likewise, refinancing rates remain favorable and also are supportive of a general, good economic outlook.  However, most of the refinancing of the residential market has taken place; therefore, there will be weakening volume in this area.  Interest rates should continue their climb.

            IN SUMMARY:   The real estate market appears, overall, to be doing reasonably well.  This may in large part be due to a lack of other investment alternatives that are available and acceptable to the investor.  THE QUESTION:  What will happen in the U.S. real estate market after year-end 2005?

Dr. Mark Lee Levine
Director/Professor
Burns School of Real Estate and Construction Management
Daniels College of Business, University of Denver
2101 S. University Blvd. Room 380
Denver, Colorado 80208