2008 Annual Industry Forecast

Jan. 1, 2008

Take a look into the future with predictions for educational, hospitality, multi-family, healthcare, industrial, retail, and office building markets in 2008

Industry forecasts for the next year acknowledge the worrisome status of the economy as the escalation of utility and building material costs, the housing slump, and status of employment growth all raise concerns. Markets are currently trending well despite these factors, but the true wild card is a possible recession.




Thousands of schools built in the 1950s and ‘60s are in desperate need of modernization or replacement. Coupled with demand for new schools following the recent housing boom, the United States is projected to spend hundreds of billions of dollars on school construction over the next 10 to 20 years. For 2008, the Washington, D.C.-based American Institute of Architects' (AIA) semiannual Consensus Construction Forecast estimates a 4.1-percent increase in spending on educational facilities. Part of this is attributed to the good financial position of state and local governments to support growth in spending in the education sector.

From 2004 to 2007, K-12 projects have been unable to attract the requisite general contractors and subcontractors necessary to maintain historical pricing levels. In the coming years, however, this pricing pressure is expected to release and may enable a realignment of K-12 budgets and construction costs. The impact of this financial relief would be felt on a region-by-region basis, but could also be offset by higher prices for asphalt, copper, steel, aluminum, and cement. Global pressures, such as the tremendous construction activity taking place in China, are continuing to have an adverse short-term effect on building material costs. Inflation could also be compounded by the falling value of the U.S. dollar, as exports become more attractive and imports are more costly.

There is a recent trend of green, high-performance schools, and there are some compelling findings in Greening America's Schools, a report from Washington, D.C.-based Capital E and cosponsored by the AIA, that are significant when it comes to new construction. The report references a 2005 Turner Construction Co. survey of 665 school executives: 68 percent discouraged the construction of green schools because of higher costs, 64 percent said it was due to a lack of awareness of benefits, and 47 percent of respondents reported a difficulty in quantifying benefits.

Greening America's Schools addresses all of those concerns and presents a nationwide review of 30 green schools that indicates green schools cost less than 2-percent more than conventional schools (roughly $3 per square foot). Furthermore, the financial benefits are approximately $70 per square foot and more than 20 times the initial cost when reduced energy and water consumption are factored into the lifespan of the school (schools last an average of 50 years).

On the legislative front, Arizona, California, Connecticut, Florida, Iowa, Illinois, Massachusetts, Maryland, Missouri, North Carolina, New Mexico, New York, Oregon, South Carolina, and Texas are all currently pursuing (at press time) the passage of various bills that focus on design and construction standards for newly constructed or renovated state buildings, public school facilities, and/or higher education facilities. Additional pending legislation pertains to grants for capital costs to meet energy-efficiency standards for schools and the authorization of the issuance of severance tax bonds for the financing of green schools.

Congress is also currently considering a number of bills that would provide federal grants to school districts to build healthy, high-performance schools.

Gerald Reifert is principal, Mahlum Architects(www.mahlum.com), Seattle, and a member of the Washington, D.C.-based American Institute of Architects' Committee on Architecture for Education(www.aia.org/cae_default).


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A modest slowdown in the United States is forecasted for lodging industry performance in 2008. For the year, occupancy levels are projected to experience a slight decline (of 0.7 percent), while average daily room rates (ADRs) should grow by 5.3 percent. The net result is a 4.5-percent gain in revenue per available room (RevPAR), the slowest pace of RevPAR growth since recovering from the 2001-2003 industry recession. While this forecast calls for a deceleration in the pace of revenue growth, it should be noted that the 4.5-percent RevPAR growth rate is still above the long-term average of 3.3 percent.

Given the cyclical nature of the lodging industry, a slowdown in performance does not come unexpectedly. There is no imminent catastrophic industry or economic recession predicted; however, hoteliers are concerned that the residential credit crunch might have a negative impact on leisure travel in the summer of 2008. On the other hand, corporate profits continue to support commercial lodging demand.

Across the board, all segments of the lodging industry are forecasted to experience flat or declining occupancy levels in 2008. Therefore, the ability to grow room rates will drive revenue growth for the year. Luxury hotels are forecasted to achieve the greatest gains in ADR (6.6 percent), followed by properties in the Midscale without Food and Beverage (6.0 percent) and Upscale (5.5 percent) segments. Luxury hotels enjoy a loyal base of guests who are less affected by the recent dour economic news. The Midscale without Food and Beverage and Upscale segment chain scales include several "select-service" brands that are very popular among both business and leisure travelers. Due to aging properties and an orientation toward price-sensitive travelers, hotels in the Midscale with Food and Beverage (3.8 percent) and Economy segments (2.9 percent) are expected to lag in ADR growth.

Geographically, all regions of the nation are forecasted to experience growth in RevPAR. Buoyed by inbound international travelers taking advantage of favorable currency exchange rates, gateway cities such as New York, Miami, San Francisco, and Los Angeles should continue to enjoy particularly high occupancy levels and average daily room rates.

A healthy, 8.5-percent increase in the bottom line of the average U.S. hotel in 2008 is forecasted. Of concern for hoteliers is the rise in the cost of operations. While revenues are predicted to increase by 5.3 percent, hotel operating costs are projected to rise by 4.0 percent, nearly double the expected pace of inflation. Labor related costs make up 45 percent of operating expenses at the typical hotel. Low national unemployment rates put pressure on wage rates and make it difficult for hotel managers to find staff. Further, there appears to be an increase in expenses that management has less control over (employee benefits, utilities, property taxes, and insurance).

While the total pipeline of planned hotel projects is at an all-time high, only a small number are actually breaking ground. The high costs of construction and land, combined with disciplined lending, have helped to control the volume of new supply additions. In many circumstances, the purchase and renovation of an existing hotel is more feasible than the construction of a new property.

Given our analysis of current hotel construction activity, a 2.6-percent increase in lodging supply in 2008 is predicted, or approximately 115,000 new hotel rooms. This is the greatest annual supply increase since 2000, but still less than the 150,000 new rooms added in both 1998 and 1999.

Annual Results: 2006 to 2008 Forecast
 OccupancyAverage Daily Rate
Chain Scale20062007*2008*20062007*2008*
  ForecastForecast ForecastForecast
Luxury71.20%71.20%71.20%$272.76 $287.49 $301.00
Upper-Upscale71.20%71.00%71.30%$150.94 $158.94 $166.56
Upscale70.20%69.30%69.20%$111.54 $117.67 $123.32
Mid with Food and Beverage59.40%58.80%58.60%$82.23 $84.86 $87.40
Mid without Food and Beverage66.20%66.70%67.60%$81.52 $86.25 $89.87
Economy57.20%57.40%57.20%$52.28 $53.80 $55.17
All Hotels63.30%63.40%63.40%$97.73 $102.98 $107.31
* Based on actual data through September 2007
Sources: Smith Travel Research, PKF Hospitality Research

Robert Mandelbaum is the director of research information services for PKF Hospitality Research. He is located in the firm's Atlanta office (www.pkfc.com).


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Apartment builders and operators are preparing for a busy year. Approximately $216 billion in subprime and Alt-A mortgages will reset for the first time this year, which could ultimately push 3 percent of all outstanding mortgage debt into default. As a result, a large number of households will return to the renter pool throughout 2008. To compensate, builders are expected to expand existing apartment inventory by 1.1 percent, or more than 100,000 new market-rate units. Apartment developers are concentrating much of their efforts in metropolitan areas with above-average job and population growth; however, opportunities exist across all regions of the nation.

The Southwest is leading the surge in construction with inventory growth of 2 percent, or 28,400 new units, expected by year end. Texas builders are a major factor in the upswing. Austin, San Antonio, Houston, and Dallas will post expansions of 3.9 percent, 2.1 percent, 2.0 percent, and 2.0 percent, respectively, this year. Houston, Dallas, and Austin are also forecasted to lead all other U.S. metros in terms of their absolute number of apartments built, with the anticipated delivery of 9,100 units; 7,500 units; and 5,500 units, respectively.

The South Atlantic region, lagging slightly behind the Southwest, is poised to receive more than 28,000 new apartments. Charlotte, Charleston, and Raleigh-Durham in North Carolina; Jacksonville, FL; and Little Rock, AR, are leading construction activity, with apartment stock in each metro forecasted to grow between 2.4 percent and 3.9 percent, totaling more than 9,400 new units. Meanwhile, apartment developers have largely avoided Tulsa, OK; Lexington, KY; and Tennessee's Chattanooga and Knoxville, which are among four of the six major metros with no projected apartment construction for 2008.

Denver and Phoenix, two cities with a significant number of mortgage defaults, will lead the western United States in apartment construction. Denver is forecasted to post the biggest expansion to inventory, with rental stock growing 2.1 percent this year. Meanwhile, builders in Phoenix are slated to bring nearly 4,100 new units online, the largest number of completions in the West and the fourth highest in the country. Although the region is anticipated to receive nearly 26,500 units in 2008, apartment builders' efforts have receded in California's Ventura County and Sacramento; Tucson, AZ; and Colorado Springs, CO.

Elevated job creation in and around Washington, D.C., will continue to fuel apartment construction in the outlying areas. Fairfield County and suburban Maryland top the list of apartment construction in the Northeast, with inventories expected to expand 2.1 percent and 1.9 percent, respectively. Considerable municipality-created barriers to construction and a lack of developable land in New Jersey and Long Island will keep apartment construction low in these areas, while job losses and out-migration are expected to further limit inventory additions in Syracuse, NY.

YearTotal Units CompletedInventory Growth
Sources: Marcus & Millichap Research Services, Reis, PPR 

Apartment inventory will continue to expand in the Midwest, albeit at a relatively slower pace than the rest of the county. Midwest developers are forecasted to push inventory levels 0.5-percent higher by year end. Chicago's apartment market is anticipated to receive the greatest number of new units, with nearly 2,300 rentals slated for completion in 2008. Milwaukee, Omaha, and Minneapolis will likely record the most significant percentage change to existing stock, as all three areas are projected to post inventory growth of approximately 0.9 percent. Job and population losses have stalled apartment construction in a number of areas. Detroit, Cincinnati, St. Louis, and Columbus, OH, are forecasted to post inventory expansion between 0.1 percent and 0.3 percent, while Cleveland builders do not plan to construct any market-rate rentals this year.

The conversion of apartment communities to for-sale condominium complexes and back into market-rate rentals, as well as the leasing of individual condominium units and single-family homes, will be a minor (but interesting) trend shaping the national apartment market this year. These trends are expected to significantly impact metropolitan areas with greater single-family home affordability and where condo conversions were highest. The effect on leasing activity on the national level, however, will be modest. Persistent demand will support apartment operators' ability to maintain occupancy levels throughout 2008 despite accelerated apartment construction and non-apartment housing leasing. By year end, nationwide vacancy is expected to remain unchanged in the mid- to high-5 percent range, with asking rents appreciating at an average of 4 percent. 

Hessam Nadji is managing director, research services, at Marcus & Millichap Real Estate Investment Services' San Francisco office (www.marcusmillichap.com).


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The market for medical office and healthcare facilities is likely to continue to be strong in 2008 despite some recent volatility in this sector. According to New York City-based Real Capital Analytics, capitalization rates for medical office buildings increased by 4 basis points from 6.99 percent to 7.03 percent between the second and third quarter of 2007, showing the effects of a tighter lending market. High-leverage buyers have been impacted the most, giving lower-leverage participants the ability to be more selective in their bidding.

The average sale price per square foot decreased to $224 in the third quarter of 2007 from $232 in the fourth quarter of 2006, according to Real Capital Analytics. This change in pricing, which is generally following the larger market for real estate, is likely to continue, especially if the debt markets fail to improve; however, medical office could benefit from its demonstrated stability compared to other types of real estate that are more sensitive to changes in the economy. This could help reduce the impact of the debt market malaise on healthcare-related real estate.

Monetization activity is also expected to be strong as equity capital remains very interested in medical office and transactions continue to be sought after, albeit at a less frenzied pace. While it is likely that the pace of transactions may slow in the near term, the long-term prospects remain strong. The economic and regulatory pressures driving health-system monetization and the need for new medical office buildings (MOBs) will remain in place. Interest will continue to come from a range of parties active today, including the healthcare REITs, which only own 2 percent of the U.S. healthcare real estate market and are looking to increase their presence in this $750 billion market, according to the Washington, D.C.-based National Association of Real Estate Investment Trusts.

Increasing consumerism is driving significant changes in the healthcare industry. Healthcare services are appearing in the retailing environment, such as "Minute Clinics" at Wal-Marts and grocery stores. But, the more significant dynamic impacting healthcare design and construction is retailing in the healthcare environment.

Both on and off hospital campuses, ambulatory care facilities are delivering a broader array of healthcare services, driven by consumers' desire for more convenience. These "healthcare villages," easily surpassing 125,000 to 150,000 square feet in size, are becoming healthcare destinations of their own, offering outpatient surgery, oncology treatment, wellness centers, pain management, physician offices, patient education classrooms, imaging and diagnostic capabilities, urgent care, and other ancillary healthcare services. Beyond the array of healthcare services, these facilities also include other retail uses (bank branches, Internet cafés, health libraries, pharmacies, and other retail uses).

Healthcare is the most regulated industry in the country and, with the 2008 election looming, discussion of healthcare policy and legislation is likely. Regulations likely to have the greatest impact in the near term on healthcare facilities include:

  • Universal healthcare coverage. Every state is taking some kind of action to increase access to healthcare coverage for its citizens. Meanwhile, presidential candidates are outlining their federal coverage proposals. One issue that isn't being addressed by anyone: the thousands of additional physicians, nurses, pharmacists, health aides, and technicians who will be needed to satisfy the demand generated by the 48 million uninsured who will have new access to healthcare.
  • Pay for performance. Driven by demands for greater quality in the hospital environment, implementation of P4P (pay for performance) will drive up healthcare costs in the short term, but should enhance revenues long term.
  • Electronic medical records. Long overdue, this initiative is gaining acceptance across the industry. The goal is that, eventually, patients' medical records will follow them along the continuum of care. Legislation is pushing this forward, but it's another unfunded mandate.

This article was written by Dan Prosky, vice president, acquisitions, Santa Ana, CA-based NNN Healthcare/Office REIT (www.nnnhealthcareofficereit.com); Jonathan Winer, managing director, transaction real estate, New York City-based Ernst & Young (www.ey.com); and Gordon Soderlund, senior vice president, strategic relationships, Palm Beach Gardens, FL-based DASCO Cos. (www.dascomed.com). Both Prosky and Winer are chairs, and Soderlund is vice chair, of BOMA's Medical Office Buildings and Healthcare Facilities Committee.


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Last year turned out to be a surprisingly good year for owners of distribution properties, in view of the economic and financial turmoil. Looking ahead, another good year for landlords is anticipated, albeit slightly less rosy than 2007. The biggest risk to the outlook hinges on the economy, with the consensus forecast calling for a slowdown in real GDP growth, but not an outright contraction.

One of the key features of the current cyclical expansion of the U.S. distribution property markets is the impressive restraint displayed by developers. For 2007 as a whole, new deliveries will likely end up below the previous year's total of 142 million square feet, and last year's deliveries amounted to a mere 2.7-percent increase in the inventory in place.

The restraint exhibited by developers is truly remarkable - especially considering that market signals were urging them to go for broke. Leasing-market fundamentals remained strong, cap rate declined to record-low levels, interest rates remained low, and institutional and sovereign investors maintained their voracious appetite for income-generating assets, including commercial real estate.

Recent events are likely to reinforce developers' restraint. Since mid-year 2007, financial markets worldwide have been roiled by shock waves from the implosion of the subprime mortgage market. When the crisis ends, it is likely that the major funding sources for commercial real estate will still be intact and functioning, including the CMBS (commercial mortgage-backed securities) market. Private borrowers, however, will face appreciably higher interest rates and more stringent credit terms than they did on June 30, 2007. The net result will likely be a slowdown in the pace of newly started distribution facilities, along with other types of commercial property, during 2008.

The outlook for the distribution property markets is predicated on the consensus forecast for the U.S. economy. If the U.S. economy manages to avoid a recession during 2008, then the U.S. distribution property market will likely record its sixth year of expansion.

Leonard Sahling is first vice president of research at ProLogis(www.prologis.com), an industrial REIT in Denver.


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While consumers are still spending, most research indicates that it's time to pull back the reigns. If it's true that retail mirrors the housing market, then the industry is headed for a slowdown in 2008. Rising gasoline prices and energy costs, and a plateau in employment growth, combined with the housing slump, are sure to impact consumers' discretionary spending. Accordingly, construction starts and deliveries have already started to slow. Unfortunately, an imbalance of supply and demand has occurred as "developers keep building ahead of absorption rates," the Urban Land Institute and PricewaterhouseCoopers' Emerging Trends in Real Estate 2008 report states.

According to a third-quarter 2007 report released from Bethesda, MD-based CoStar Group Inc., the average size of projects delivered and under construction has been trending upward for the past three quarters. Mixed-use developments and lifestyle centers remain popular and are primarily responsible for the increase in gross leasable area.

Construction of traditional malls has all but ceased as consumers demonstrate a preference for the convenience offered by a combination of retail, office, entertainment, and residential facilities. The trend toward mixed-use is sure to continue in the coming year. Construction of open-air malls is likely to continue as well, with tenants benefiting from maintenance fees that are sometimes as much as 70- to 80-percent below those at regional malls.

Older malls (specifically Class-B and Class-C malls) are likely to see increasing vacancies (a result of the market's high volume of development). Emerging Trends forecasts the return of the ghost mall, but offers a silver lining: These centers are ideal for revitalization. Spaces vacated by anchors provide traditional malls with the opportunity to add a mixed-use component. If steps aren't taken to breathe life into old centers, the best option may be demolition or an entirely new use.

While not all economists and analysts are so pessimistic, predictions are tinged with caution. Even the Washington, D.C.-based National Retail Federation's forecast of sales growth for the total 2007 holiday season, at an increase of 4 percent - the slowest holiday sales growth since 2002 - is telling. Will this slow retailers' expansion plans in 2008? The jury is still out.

This forecast was compiled with information from Emerging Trends in Real Estate® 2008 (a report released by PricewaterhouseCoopers and the Urban Land Institute), the National Association of Real Estate Investment Trusts, CoStar Group Inc., Grubb & Ellis, and the National Retail Federation.


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At press time, the crystal ball for the office market in 2008 is foggier than at any time since the bursting of the tech bubble in 2000. The chance of a recession is around 50 percent. But, even in the absence of a recession, job creation - the main driver of demand for office space - is poised to decelerate for a third consecutive year. The financial sector, a primary office-using industry, is struggling with the credit squeeze; more layoffs appear likely, particularly in Manhattan and other big financial centers. The office market has already begun to slow as space available for sublease across the United States rose from 73 million to 77 million square feet in the third quarter of 2007, the first quarterly increase in 5 years.

If the economy sidesteps a recession in 2008 and the labor market generates jobs at a net pace of 75,000 per month (as opposed to 125,000 per month in 2007 through October), the office market could absorb 36 million square feet, a cut of nearly half from 2007. Further assuming completions of 40 million square feet, a 10-percent decline from 2007, vacancy would end 2008 at 12.9 percent, down a slim 10 basis points over the course of the year. With the market largely stable in 2008, expect Class-A asking rental rates to increase by 4 percent for CBD space and 2 percent for suburban space, a sharp deceleration from the latest year-over-year readings of 19 percent and 9 percent, respectively. Sublease space is expected to rise, but not a great deal.

U.S. Office Vacancy and Absorption
 Million Ft2 
 Absorbed% Vacant

Markets likely to hold up well as the U.S. economy slows include Seattle, the Bay Area, Los Angeles County, the Mountain region (including Denver and Salt Lake City), Texas, the Carolinas, the District of Columbia, Manhattan, and Boston. Even though several of these markets are vulnerable to layoffs by financial services firms, their tight market fundamentals and momentum suggest some staying power. Phoenix and Las Vegas should see their commercial sectors grow, although their residential sectors are struggling. Though the office market in South Florida recorded negative absorption in 2007, the region is generating jobs outside the housing sector, which bodes well for office absorption in 2008. Atlanta is also generating jobs, though high vacancy and a full construction pipeline will keep the market from tightening much in the coming year. Chicago presents a tale of two markets, with downtown looking brighter than the suburbs.

The economic risk lies to the downside, meaning that a recession is more likely than vigorous growth in 2008. A recession would generate layoffs, pushing absorption into the red. The amount of hemorrhaging would depend on the severity of the job losses. The office vacancy rate hit an ultra-low 8.5 percent before the onset of the 2001 recession - far lower than the current 13.0 percent. During and after that recession, the vacancy rate soared by a steep 1 percentage point per quarter, pushing vacancy up dramatically in a short period. Part of this rapid deterioration resulted from the practice by tech companies of leasing space in advance of need in some markets to avoid having growth plans stymied for lack of space. As things turned out, that was the least of their worries, as many went bankrupt before they had a chance to occupy their space. If the coming year brings a recession, the market has more slack than it did prior to the last recession, but it is unlikely to deteriorate as quickly as it did in 2001 and 2002 - a small measure of comfort if the worst comes to pass in 2008. 

Robert Bach is senior vice president and chief economist at Northbrook, IL-based Grubb & Ellis(www.grubb-ellis.com).

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