Multi-Family Still Best Bet for Investors, Livingston Predicts

ORLANDO-Developer George D. Livingston’s crystal ball on all commercial real estate markets remains cloudy for the rest of the year but starts to clear up in the first half of 2003, the Central Florida chapter president of NAIOP tells GlobeSt.com.

Livingston told GlobeSt.com in April he expected a year-end rally in 2002 for warehouse, distribution and manufacturing product. He has now revised his position.

“All real estate property types and most markets remain week,” he says.

Residential housing “remains the one bright spot and is spurred by historically low interest rates,” says Livingston, founder/chairman of Maitland, FL-based NAI Realvest Partners Inc.

Financial, medical and other service sectors are also holding up “and are showing demand for space,” the developer says.

Multi-family properties will continue to hold the interest of most investors, even as good apartment development sites stay short in some growth areas, he predicts.

Leading the multi-family recovery in 2003 in the Southeast will be Atlanta, Austin, Charlotte, Dallas, Memphis, Nashville, Orlando and Raleigh.

Livingston uses data from Real Estate Market Cycle Monitor at Legg Mason Equity Research to form his projections.

Weak job growth is stalling a surge in multi-family development, Livingston tells GlobeSt.com. Homes remain a main competitor due to low interest rates. Job growth is not expected until 2003.

“The market may be bottoming but will not show strong growth until jobs are created again,” the developer says. Occupancies are beginning to stabilize because of lower rents and concessions, such as free rent for negotiable periods.

“Demographic trends remain favorable,” Livingston says, but “rental rates may show a modest decline for the year.”

Construction continues to slow in all commercial sectors, the developer says. “This should eventually lead to a softer cycle bottom than in the early 1990s,” he says.

Construction starts and completions are “roughly up 2% for this year and expected to drop to 1% next year. Low interest rates “have played a role and have limited mortgage defaults.”

The office sector is still in the doldrums with vacancies averaging 16%. “Some markets, especially those with a high percentage of technology tenants, have even higher vacancies,” Livingston says.

Rents continue to drop as owners fight sublets and compete for tenants. “Absorption was a negative 5% for this (third) quarter but has improved from the negative 38 million sf of last quarter,” the developer says.

Most tenants are “staying put or are not committing for long-term leases” as they “aggressively negotiate rates and terms.”

The office market is “likely to remain weak, at least through year-end,” Livingston says. “Rental rate growth is likely to be negative.”

Markets expected to recover first in 2003 are Atlanta, Fort Lauderdale, Jacksonville, Memphis, Raleigh and Richmond. Next in line may be Orlando, Tampa, West Palm Beach, Charlotte, Houston, Miami and Nashville.

Industrial markets are “stabilizing and perceived to be at their cyclical bottom,” Livingston tells GlobeSt.com.

Third-quarter vacancies are slightly above 10% on average but up from the second quarter. “Tenants continue to delay decisions” to expand or relocate.

“Consolidations are occurring,” the developer says. Rents are flat to slightly lower. Warehouse and distribution space occupancies are stable.

“R&D space, on the other hand, reflects the same problems inherent in the office market, especially in tech-rich markets,” Livingston says. Absorption shows a modest positive gain.

Leading the office sector recovery in 2003 will be West Palm Beach, Houston, New Orleans, Richmond and San Antonio. Right behind should be Austin, Charlotte, Dallas, Fort Lauderdale, Memphis, Nashville, Orlando, Raleigh and Tampa.

Retail markets “mirror the other market sectors and the economy in its decline,” the developer says. But markets with tourists have improved. Still, retail rental growth is likely to be flat.

“There is strong investor interest in the sector and developers continue to seek sites for future development in growth markets,” often competing fiercely for the best locations, Livingston tells GlobeSt.com.

Austin, Tampa and Orlando should be among the first to recover in the retail market in 2003.

The hotel market may have bottomed out, the developer says, since occupancies are improving. But the business traveler has not come back.

New construction starts remain low but “bottom-fishing investors are looking,” the developer says. “At least one REIT is over-allocating this sector.”

Livingston suggests “the time to begin (new) development may be here, given the lag from start to delivery, for those that are willing to accept risk.” He says “the main wild card remains the terrorist threat.”

The developer fears “a major (terrorist) attack would severely dampen demand and set back the recovery by two quarters, perhaps more.” He says “an attack on Iraq or a setback in Afghanistan would also have an unknown negative impact.”

Livingston’s crystal ball shows “we are clearly in a (new) high-rish/high-return period.”