Forecast 2003: Property Prophets

Dec. 31, 2002
Success in Today’s Market Demands More
The 2003 Buildings Forecast, now in its 41st year, is almost a repeat of the 2002 Forecast: New Construction plans decline slightly, and Modernization/Upgrades show some increases. Particularly noteworthy, however, is the fact that 98 percent of those buildings professionals responding to the annual forecast indicate their spending on New Construction and Modernization/Upgrade will be the same or larger in 2003 than in 2002. The optimism of those responding indicates that continued growth in the general economy will also be reflected in more project activity, especially in the New Construction market.

As in 2002, the Education segment continues to lead the non-residential market in New Construction spending for 2003. According to respondents to the Buildings' survey, New Construction activity in the Educational segment is estimated at $31.57 billion in 2003, compared to approximately $30.52 billion in 2002. Healthcare should also enjoy a healthy increase in 2003. Survey figures predict Healthcare New Construction increasing from just under $6.6 billion in 2002 to more than $7.01 billion in 2003. Multi-family Housing should experience a small increase; estimates for New Construction in 2003 are $11.43 billion, compared to $11.14 billion 2002.

Total Project Spending 2003 Estimated Spending 2003Comparative Spending 2002Office$70,967,000,000$72,754,000,000Retail$56,109,000,000$57,811,000,000Hotel/Motel$12,291,000,000$12,674,000,000Education$49,962,000,000$48,319,000,000Healthcare$13,958,450,000$13,292,000,000Apartment/Condo$18,166,860,000$17,983,000,000Government$17,906,000,000$18,271,000,000Other Commercial$22,316,740,000$21,534,000,000Total$261,677,050,000$262,638,000,000SOURCE: 2003 FORECAST OF THE BUILDINGS MARKET; Projected spending of Buildings' subscribersNot surprisingly, New Construction in the Office market is expected to decline again next year as slow growth, rising vacancy rates, and difficulty in obtaining terrorism insurance continue to impact this market. Estimated spending in 2003 is at $20 billion, compared to approximately $22.47 billion in 2002. Other New Construction figures of note include: Retail, down to $14.85 billion in 2003, compared to $15.27 billion in 2002; Hospitality, down to $4.34 billion in 2003, compared to $4.98 billion in 2002; and Government, down $10.69 billion in 2003, compared to $11.21 billion in 2002.

In sharp contrast to New Construction, Modernization continues to enjoy healthy increases. This is especially true in the Office and Retail sectors, where trophy properties are going for record prices. Substantial monies are being spent on infrastructure improvements, new technologies, and cosmetic changes. Security concerns have also led to significant expenditures as existing facilities ramp up to address building occupant concerns.

According to Buildings' respondents, the following building segments will show increases in Modernization and Building Upgrades in 2003:
Office. Estimated spending for Modernization in 2003 up to $46.23 billion, from 2002's $45.77 billion. Upgrades will increase from slightly more than $4.51 billion in 2002 to approximately $4.74 billion in 2003.
Hotel/Motel. Estimated spending for Modernization in 2003 up to approximately $7.2 billion, from 2002's $6.99 billion. Upgrades will increase from $709 million in 2002 to approximately $756 million in 2003.
Education. Estimated spending for Modernization in 2003 up to $16.4 billion, from 2002's $15.93 billion. Upgrades will increase from approximately $1.88 billion in 2002 to slightly more than $1.99 billion in 2003.
Healthcare. Estimated spending for Modernization in 2003 up to more than $6.04 billion, from 2002's $5.84 billion. Upgrades will increase from $855 million in 2002 to more than $903 million in 2003.
Government. Estimated spending for Modernization in 2003 up to $6.38 billion, from 2002's $6.26 billion. Upgrades will increase from $805 million in 2002 to $837 million in 2003.
Other Commercial. Estimated spending for Modernization in 2003 up to $11.02 billion, from 2002's $10.75 billion. Upgrades will increase from slightly more than $1.31 billion in 2002 to approximately $1.37 billion in 2003.Showing similarities to 2002 figures, the Retail building segment will see approximately $37.12 billion in Modernization spending in 2003, compared to $38.37 billion in 2002, according to the Buildings' survey. Upgrades remain steady with estimated spending in 2003 at approximately $4.16 billion. Apartments and Condominiums will experience a slight decline in Modernization dollars in 2003, at $6.15 billion (compared to just under $6.26 billion in 2003), but Upgrade spending will increase slightly from $587 million in 2002 to approximately $590 million in 2003.

2003 Forecast of the Buildings Market reports are available by contacting Robin Melichar, marketing supervisor, at (800) 553-8878, X5053.

New Construction Steady
According to Construction Outlook 2003 from McGraw-Hill Construction Dodge Analytics, the value of new construction starts in 2002 for all types - Residential, Non-Residential, and Non-Building - was projected to be steady, holding in the range of $495 billion to $500 billion. For 2003, it's expected that the economy will grow at about three percent, following the tenuous initial phase of recovery in 2002, with the uncertainties of business growth, consumer confidence, and U.S. military strategies affecting it.

While the Dodge report indicates the construction industry would derive some benefit from an improving economy in 2003, it also notes several constraints: the fiscal stress of state and federal government, based upon diminished tax revenues from the 2001 recession; possible upward movement of interest rates; and tepid employment growth, based upon firms continuing to cut costs and postpone additions to their staffs.

As a result, the value of new construction starts is not likely to see an increase in 2003, and a one-percent decline is projected. Dodge notes the following main points for the 2003 construction market:
Single-family housing will ease back from 2002's exceptionally strong level. Although housing starts in 2003 will still be high by recent standards - six percent above the average reported for the latter 1990s - the number of stats will be down three percent to 1.215 million units (Dodge basis), which translates into no change in dollar terms.
Public works construction will drop three percent, after rising five percent in 2002. Fiscal 2003 federal spending for highways is likely to be lower than 2002's numbers, leading to a four-percent decline for highway and bridge construction.
Electric utilities will continue to retreat from the record high reported in 2000, with the value of construction starts down 24 percent in 2003.
Income properties will post a slight two-percent gain in dollar volume, due to an expected increase in multi-family housing. Excluding multi-family housing, the commercial categories in 2003 will drop an additional one percent, following the plunge in 2002.
Institutional building will edge up one percent in dollar volume. School construction will continue to settle back from its record high reached in 2001, while healthcare facilities should at least equal 2002's heightened contracting.
n Manufacturing building is expected to rise six percent from its 2002 level, helped by modest improvement in capacity utilization, although the dollar amount will still be well below 2001 figures.
2003 New Construction Estimates for Non-Residential BuildingsFloor Area (Millions of Square Feet)Building Type2001 Actual 2002 Preliminary2003 Forecast% Change 2003/2002Stores and Shopping Centers280250240-4Office Buildings226160148-8Hotels and Motels534039-3Other Commercial Buildings432350339-3Manufacturing Buildings947072+3Total Commercial and Manufacturing1,0851,085870838Educational Buildings274272260-4Healthcare Facilities91101103+2Other Institutional Buildings 225212209-1Total Institutional and Other590585572-2Total Non-Residential1,6751,4551,410-3SOURCE: CONSTRUCTION OUTLOOK 2003, MCGRAW-HILL CONSTRUCTION DODGE ANALYTICSBest Investment Bets
Emerging Trends in Real Estate 2003®, an annual report published jointly by Lend Lease Real Estate Investments Inc. and PricewaterhouseCoopers LLP, and in its 24th year, forecasts a continuation of lackluster performance, as markets struggle to escape from a relatively shallow, but extending cyclical downturn. On a relative basis, real estate may sustain returns that continue to beat stocks and bonds, but robust gains are not expected. Overall returns should hover in the mid to upper single digits; however, commodity properties with vacancy problems could suffer serious declines, since capital will focus on premium, well-leased buildings with locked-in cash flows. All in all, 2003 promises to be a choppy, maybe even challenging period in the property markets.
Among the best investment bets in 2003, according to Emerging Trends in Real Estate 2003®, are:Buy warehouses in major transportation hubs. These industrial properties are "a great defensive play."
Concentrate office investing in established 24-hour markets (downtown and sub-city). Returns "won't be glamorous," but certainly "solid" and "reliable."
Invest in fortress malls through REITs. Public operating companies have effectively cornered the A mall market.
Buy Double-B CMBS. Their returns register in the high single digits, and they're less volatile than REIT stocks while providing considerably more liquidity than private real estate.
Focus on diversified markets with defense industries.
Borrow. Take advantage of the historically low interest rates while you can.
Hold apartments. High pricing coupled with softened occupancies and rental rates reduce the attractiveness of multi-family acquisitions temporarily. But long-term market trends are extremely favorable.
Buy in the hot-90s-tech-boom markets that have gone cold.Linda K. Monroe ([email protected]) is editorial director at Buildings magazine.

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