Summer Cycle on Solid Ground

摘要

During the summer of 2006, the recovery of the domestic economy appears to remain on track, although economic growth is expected to moderate somewhat. Rising interest rates, high energy costs, and the trade deficit remain major question marks. Fortunately, these trends are not new and to this point, the economy has been able to navigate through them. The housing market is expected to slow down, both in terms of new starts and price gains. However, improving economic conditions should provide a cushion that forestalls a major correction in pricing levels. Real estate capital flows are expected to continue to support the market, although the string of record prices and declining cap rates is likely over. The commercial mortgage market should remain heated with lenders aggressively placing capital and supporting existing prices. Equity capital flows will continue to fuel a frenetic pace of activity while investors compete for scarce product. Joint venture activity is expected to increase as investors seek higher returns that depend on tapping into the development side of the industry. This trend is likely to be somewhat short-lived; once the market recovery kicks in, developers will be reluctant to share entrepreneurial profits with passive capital providers. The exception will be in cases in which such ventures open new doors, as in the case of global investing and more exotic product classes. Real estate fundamentals should continue to improve, especially if construction remains in check. However, the built up momentum and investor interest may lead to a long, hot summer in which selected markets and property types bear the risk of getting overheated. Fortunately, there is little near-term risk that such conditions will be widespread and reminiscent of prior down cycles. Over the longer term, a correction in pricing levels and cap rates remains a distinct possibility as the market returns to more normal times and conditions return to long-term averages.