The Capital and Spatial Markets: Converging or Diverging?

摘要

Going into midyear, the economic expansion appears to be on solid footing. Despite some concerns, the prospects are generally positive and suggest strong economic growth for the first half of 2006, followed by a slight moderation in the second half. The capital markets will remain active, benefiting from relatively low interest rates and inflation. The real estate market should continue to benefit from strong investor interest, with plentiful debt available to support transactions. Cap rates should bottom out over the next several quarters, although the steady-state nature of market fundamentals and pent-up investor demand should hold yield requirements down. There is some risk of increasing costs of debt as investors turn attention to risk, placing upward pressure on yield requirements. Since the market is fully priced, more attention will be paid to market fundamentals putting more emphasis on income levels and pro forma returns than on appreciation rates. Despite these pressures, the near-term prospects for changes in pricing are rather benign. The exception to this may be in the housing market, especially where investor activity has helped fuel the recent run-up. With some luck and continued improvements in employment and wage gains, a correction may not occur, although appreciation levels are expected to cool. Construction activity levels should increase, although there are few signs of a major surge that would disrupt the gradual improvement in market fundamentals. Thus, the general outlook for the real estate market is for a relatively steady state.