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Report sees recovery in real estate market

A real estate forecast just published by MIT's Center for Real Estate (CRE) views some real estate sectors quite differently from other market watchers.

For instance, it predicts an uncertain future for apartments, currently favored by investors; and sees recovery ahead for offices which are still deep in the doldrums.

"The US Real Estate Market: An Economic Outlook for the 1990s," by Professor William C. Wheaton, economist and director of the CRE, focuses on the office, industrial, and residential markets. Unlike many forecasts, the MIT report is based on a series of proven econometric models that analyze historic linkages between real estate markets and the national economy. CRE is known internationally for its research in the real estate field.

"This kind of forecasting, based on scientific models, should be of significant value to the real estate industry," CRE chairman Blake Eagle said. "The forecasts are more accurate two or three years out than those based on anecdotal evidence or past performance."

Professor Wheaton noted that while the hallmark of real estate in the '90s overall will be recovery and slow growth, certain property markets will begin to show returning strength. In the residential market, single-family housing is one of the bright spots, in spite of demographic projections showing a 25 percent decline in the number of new households in the 1990s compared to the last decade. Based on new econometric models focusing on the interactions between the apartment and single-family markets, the MIT study expects the apartment market to absorb the brunt of the decline in household formation. Single-family house prices should continue to rise as they have over the last 30 years, easily exceeding the inflation rate.

While office construction should not resume much before the end of the decade, the MIT report does expect office vacancy rates to decline and rents to begin a strong recovery in the next year or two. In spite of service industry restructuring, office hoteling and other changes in the work environment that tend to decrease the demand for office space, Professor Wheaton sees these trends more than counter balanced by the increasing professionalization of the work force (and the resulting increase in space per worker) and the low cost of space which can be leased for half the rate of 10 years ago in some locales.

"In the office market, I am optimistic about the prospects for recovery despite all the talk of downsizing," Dr. Wheaton said. "Space is currently a cheap commodity in the United States. Companies could think about what space they will need and lock it in at today's prices."

The picture for the industrial market is more mixed. The outlook is for continued improvement in US productivity-good news for the economy but not as good news for owners and builders of manufacturing and distribution space. The MIT study finds that the demand for manufacturing space depends on industrial output, so the expected growth in this sector should generate some demand for additional space. However, US firms have become increasingly sophisticated in inventory management over the last decade, so little new distribution space will be needed in the aggregate.

The CRE's forecast was sponsored by Copley Real Estate Advisors, the International Council of Shopping Centers, Merrill Lynch Hubbard, Morningside North America Ltd. and Rose Associates. It was produced with research assistance from CB Commercial. The forecast will be available to the public on February 28 at a cost of $75 per copy. To order a copy or for more information, call Joanna Ennis at (617) 253-4373.

The CRE promotes research and education in real estate development, management and investment, and it facilitates communication among members of the real estate industry worldwide, both with each other and with the academic community. The Center's major activities include a 12-month Master of Science in Real Estate program, professional education for real estate practitioners and research on important issues in the field.

A version of this article appeared in the February 16, 1994 issue of MIT Tech Talk (Volume 38, Number 23).

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