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VOL. 125 | NO. 239 | Thursday, December 9, 2010

ULI: Recovery to Begin in 2011

By Sarah Baker

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The real estate market is projected to turn around next year, but the industry will have to settle for baby steps in all markets and property sectors.

That was the message more than 250 bankers, investors and real estate professionals heard Wednesday at the Urban Land Institute’s fourth annual Real Estate Outlook for the Mid-South where they learned about the “era of less.”

A shrunken industry, lower returns, crimped profits and substantial losses mark the current state of the real estate market. Top concerns include job growth, refinancing, vacancy rates, deleveraging, tax policies and income and wages.

“If we can get back to 2003 and 2004 issuance, we’ll be in good shape,” said Dean Schwanke, ULI senior vice president and executive director of the ULI Center for Capital Markets and Real Estate, who spoke at the event.

While presenting “Emerging Trends in Real Estate 2011” – a trends forecast with a 32-year history and interviews and surveys of more than 800 nationwide real estate executives and market experts – Schwanke pointed out that in 2010, 35 percent of the sample said they felt good about business profitability, whereas for 2011, 56 percent report positive feelings.

Another uplifting factor heading into the new year came from October’s pending home sales, which were up a record 10 percent. But one month isn’t a trend, Schwanke said, and as one survey respondent noted, “our problems are much bigger than real estate.”

Job creation was the underlying theme in the majority of the presentations. Mixed unemployment reports include October’s 151,000 new jobs and November’s 39,000.

As for property sector investment rankings, apartments led the way, followed by industrial and distribution and hotels. Unlike other sectors, retail vacancy rates are expected to continue to rise in 2011, not fluctuating like other sectors.

For developers, “it’s siesta time,” said Schwanke, meaning new construction is not expected to start soon, and commercial real estate rents will be pushed down.

Markets to watch include Washington, New York, San Francisco and Boston. In Tennessee, Nashville ranked No. 24 in favored attributes for investors, while Memphis ranked No. 48.

Unfortunately, Memphis is “stuck in the gumbo,” said Dr. John Gnuschke, director of the Sparks Bureau of Business and Economic Research and co-director of the Center for Real Estate at the University of Memphis.

In other words, unlike Nashville, Memphis is stagnant.

“If you’re going to prosper, you’ve got to have a place where people want to live,” Gnuschke said.

However, since Memphis’ working-class community has always followed a suburban expansion path, eventually the city will grow.

“Forget about the numbers,” Gnuschke said. “We’re going to muddle through this no matter what.”

In the last 30 years, the U.S. has had four recessions, two deep and two shallow. In the 1980s, commercial real estate took a hit, and in the current economic slump homebuilders are the ones struggling.

Perhaps more than any other sector, retail has braced for change, said Scott Barton, senior vice president of CB Richard Ellis Memphis’ retail services. More mixed-use space – such as Henry Turley Co.’s Barboro Flats on South Main – and less “mindless” unanchored strip center developments are likely for the future.

While there are certainly reasons to be cautious, corporate profits and some businesses are growing, Gnuschke said. For instance, Mitsubishi Chemical Corp. recently announced it is investing $13.1 million in Memphis to manufacture and sell electrolyte for lithium batteries.

Indeed, focusing on manufacturing is a key component moving forward. And in order for the U.S. to become more globally competitive, it needs more sustainable return expectations. But despite feelings of volatility, many global investors still look to the U.S. for assets, said Earl Blankenship, president of real estate funds at SouthernSun Asset Management.

Memphis is poised for opportunity as well. Interstate 240 is one of the best micro markets in the Southeast, said Kemp Conrad, senior vice president of Commercial Advisors LLC.

And with the new city and county mayoral administrations, Conrad – who also is a member of the City Council – is bullish on the city’s future.

MORTGAGES 80 320 1,066
BUILDING PERMITS 120 590 2,248