SPECIAL REPORT: CoreNet Panel: In Spite of Everything, Real Estate Excelled in 2005
The panelists' mood was upbeat this week at the November luncheon meeting of the Chicago chapter of CoreNet. Robert Bach (pictured), national director of market analysis at Grubb & Ellis, characterizing 2005 as a remarkable year for commercial real estate.
"Through everything this year--including unprecedented natural disasters--the economy has remained strong," Bach noted, kicking off the discussion. "For commercial real estate, it's really been the best of both worlds. Capital for investment is more plentiful, mobile and more hedged against risk than it ever has been, while leasing and other fundamentals have picked up this year."
Can the market's strength carry over into 2006? "The cycle will continue," he promised, "but not quite as active. It's hard to imagine that it could be."
Interest rates remain a question mark for commercial real estate as well. Panelist Diane Swonk, chief economist at Mesirow Financial, predicted that incoming chairman of the Federal Reserve Ben Bernanke, whom she described as "brilliant, but not interested in a cult of personality like Alan Greenspan," would preside over initial short-term rate increases, but that the rate would go no higher than 5 percent next year, and possibly stop at 4.75 percent. Ten-year treasuries would be well north of 5 percent by mid-year, she added.
She declined to forecast energy prices in the near term, but did note that "investment in exploration is now worth it for the oil industry, so prices might fall in the long run, unless Congress sees fit to tax it away," referring to the possibility of a windfall profits tax on oil now being bandied about on Capitol Hill.
Panelist Richard Kincaid, CEO of Equity Office Properties Trust, discussed the outlook for the office market in some detail, noting that things improved quite a bit for the market in 2005. "In most places, building has been restrained, so vacancies are edging down," he said.
"There are exceptions, of course, such as downtown Chicago," he added. "One law firm builds a trophy building for itself, and so they all think they have to have one." The audience laughed at the comment, which pointed to the fact that several new office buildings built recently in Chicago's CBD have no other economic justification other than a major law firm moving from another building to be an anchor tenant.
Regarding the famously hyperactive investment market, panelist Peter Roberts, CEO of the Americas at Jones Lang LaSalle, said that he didn't think the activity was a function of the greater fool theory, and thus wouldn't come to grief in 2006. "International investors, for instance," he said, "are still looking for diversification, and for attractive risk-adjusted returns, and real estate's going to continue to offer that."
