Some regional markets are sizzling, while others remain on the back burner.

Spurred on by a vigorous economy and rising employment, REIT and other publicly traded real estate company funds from operations per share rose 12.3 percent on average in the fourth quarter 1999. While it is difficult to predict the future, most analysts look for continued growth in average FFO per share as long as economic fundamentals remain firm and the real estate economy remains reasonably well balanced.

"There is a direct relation between real estate growth and economic expansion," explained Chris Ludeman, president of the brokerage services for CB Richard Ellis, Los Angeles, CA. His company expects growth in 2000 to be less robust than 1999, but at still-healthy rates, particularly in those areas of the country that are enjoying a dynamic economy and commercial real estate markets remain in relative equilibrium.

Trends by Region
"The top markets that are getting the most attention are defined as stable, with a high quality of life, excellent schools, retail opportunities, and so on, which makes them attractive for investment purposes," says Ken Riggs, CEO of the Real Estate Research Corp. These areas include San Francisco, New York, Chicago, and Boston. According to Riggs, these areas are solid markets that will continue to do better on a risk-adjusted basis even through a soft real estate downturn or small recession. Investors may still get hurt, however, when entering into markets with higher development risks, such as Atlanta, Dallas, and Phoenix. "Real estate buyers are trying to find the most opportunities in those solid markets that offer the lowest risk," he adds.

Results of an institutional investment survey published by Real Estate Research Corp. indicate the factors driving the resurgence in the real estate market include the strength of the Dow Jones Industrial Average, still increasing consumer confidence, the highest retail sales recorded for the past 12 years, four to six percent increases in the real gross domestic product (GDP), slow inflation rates, and high national employment rates.

Brookfield Financial Properties Corp., New York, NY, is a real estate operating company that favors markets with high barriers to development that reduce supply pressure. "Foreign institutions and investors are buying real estate in the United States because of the lower cost of capital, favorable exchange rates, and favorable tax incentives, especially in Germany," observes Rick Clark, president and chief operating officer of U.S. operations. A good example, he adds, is New York City. "Manhattan is an island and the market is fully mature." New York and other cities like it are attractive to commercial real estate investors because they have long approval processes and good economic bases with consistent demand and limited supply.

In terms of sheer capital volume and price, the West Coast is considered to be the hottest real estate market in the United States today, according to Hugh Kelly, chief economist for Landauer Realty Group Inc., New York, NY, and editor of the Investment Trends

Quarterly, published by Landauer and the Commercial Investment Real Estate Institute , Chicago, IL. "The evidence is that that part of the country is capturing about 25 to 30 percent of the overall investment volume," Kelly says. He also cites that in the second quarter of 1999, $7.6 billion in real estate transactions were recorded, of which $2.1 billion were for properties in Oregon, Washington, and primarily California. Pricing levels on the West Coast, along with high amounts of capital, also point to the level of activity in the real estate markets there. For instance, office buildings in the United States, in both downtown and suburban sectors, have been averaging $150 per sq. ft. "In San Francisco, we are routinely seeing sales levels of over $300 per sq. ft., which is higher than any other city in the country," he says.

Northern California. Technology Driven
"San Francisco is a hot market for the same reasons as New York, even though there's more land," says Clark. The municipality controls growth with arduous approval processes and there are serious supply-side pressures in the area.

One of the reasons that such capital is being spent in and around San Francisco is the emphasis of the Northern California economy on economic diversity and technology. "Another attraction, particularly of the San Francisco peninsula, is that there is little physical room for development, making overbuilding less likely," Kelly says.

The San Francisco Bay Area, Oakland, and Silicon Valley areas are the most desirable real estate regions on the West Coast, said Dale Taysom, managing director of transactions for Prudential Real Estate Investors, Parsippany, NJ. "Capital is being spent by investors there because of tremendous job growth, high disposable incomes, and barriers to entry," he observed.

The Mayor's Office of Economic Development for San Francisco agrees that there's been an explosion in the area's real estate market. "It's clear that the high-tech companies are driving a lot of the demand for real estate in both the traditional downtown and South of Market areas," says Jesse Blount, development project manager. Underlying the reason for this sector's growth is that the city is known as a center for technological innovation and artistic creativity. "The melding of technology and the arts creates a dynamic sector which fuels the demand for office, R&D, and residential space," says Blount.

The biotechnology industry is another key factor to the popularity of San Francisco's real estate market. In particular, the Mission Bay area is being redeveloped by biotechnology firms that are basing their research facilities in the area to take advantage of such institutes of higher education as Stanford University, the University of California. Berkeley, and the University of California. San Francisco (UCSF). "UCSF is building a campus in the area specifically for biotech research, and so the entire industry is expressing interest in building facilities to co-locate near the campus," Blount observes.

The influx of all these R&D facilities and other office buildings also fuels San Francisco's residential market. "Median household incomes will be surpassing $100,000 by the end of 1999," says Blount. In addition, there has been a total increase of household income of 26 percent in the area between 1994 and 1999. "Combined with favorable interest rates, this income growth has fueled a strong demand for housing, as evidenced by double digit increases in housing prices over the last five years," he adds.

Diversity Propels Southern California
Southern California is another real estate hotspot in the United States. It is attracting attention because the region is experiencing steady growth in job creation and population, increasing the potential demand for real estate. "The depth and breadth of the economic foundation of Southern California makes it an attractive region for opportunity," says Rocky Tarantello, president of Tarantello and Associates, Newport Beach, Calif. "The demand for office, retail, R&D, industrial, residential, and apartment properties is very strong and has a lot to do with the industrial and economic activity that is based in Southern California."

Taysom agrees that Southern California is experiencing significant demand in real estate, particularly in those areas that have high barriers to entry. "In Orange County the capital is chasing deals and pricing levels are aggressive," he observes. According to Taysom, the Golden Triangle area is experiencing high demand for industrial space, while in West Los Angeles, both office and residential space are very strong markets.

In the first quarter of 1999, Class A office space in the Century City sector of Los Angeles reached a record high of $33.32 per sq. ft., while Class A rents in Santa Monica reached $32.02 per sq. ft., according to the Studley Report and Spacedata, published by Julien J. Studley, Inc., New York, N.Y. Technology firms are also moving into the area. For instance, eToys increased its office space by 17,000 sq. ft., and Microsoft recently leased 37,000 sq. ft. in Santa Monica.

Nationally, CB Richard Ellis reported a mean price of $196.89 and a mean rent of $30.78 for office space in the third quarter 1999.

The South Bay area of Los Angeles is gradually becoming a favorite spot for technology, corporate service, entertainment, and Fortune 500 companies. New development to accommodate the growing demand is increasing rapidly, according to Studley, with Class A space currently renting at an average of $20.20 per sq. ft. In the San Fernando Valley, however, the market is very tight, with almost no vacancies. The Studley report states, however, that new development is underway in the Valley and will bring some relief.

Sustainable Growth in the Northeast
Tarantello is also impressed with the outlook for the Eastern corridor from Boston through New York, to Washington, D.C. "The intermediate to long-term growth prospects are excellent, thanks to the types of industries the area is attracting," he says. The corridor from the District of Columbia to North Carolina's Research Triangle also looks good for the high-tech, industrial, and office space markets. "There is not much potential in the area for overbuilding due to the expansion already acquired to date," Tarantello adds.

The capital crunch of last year did not affect New York City's Midtown and downtown markets, and in the first quarter of 1999, both leasing and sales rates maintained their steady progressions, according to Studley. For example, 1,852,349 sq. ft. of space was leased in the first quarter in downtown New York. The report states that asking rents downtown are at $30.44 per sq. ft, and at $39.75 for Class A space, representing increases of 1.2 percent and 3.0 percent, respectively, from the last quarter of 1998.

"Washington, D.C. is a very attractive market for office and residential space, both inside and outside the Beltway," says Taysom. High job growth, generated by government service and by telecommunications and Internet companies is driving the demand. Also according to Taysom, Boston is generally very popular for residential property, if sites can be found, because of high job growth. "The Boston office building market is tight because of high barriers to entry and the city's multi-year approval process for development," he adds.

Lots of Deals in the Southeast
Continuing down the East Coast, the area from Washington, D.C., through the Carolinas, and into Florida has been experiencing the greatest number of real estate deals, according to Kelly. The attraction is twofold: pricing in the Carolinas and Georgia is still comparatively inexpensive, with properties selling closer to the national average per square foot, and the Southeast in general is experiencing robust population and employment growth. "The fastest growing populations in the country are in the South and Southeast," says Kelly. This growth has started to attract more pension fund and institutional investment, along with increased retail and hotel sales, particularly in Florida.

"Good job growth, some barriers to entry and no drastic overbuilding in any single real estate category in Palm Beach or Tampa drives the trends there," says Taysom. It is not the same, however, in Orlando, where many investors feel that overbuilding is possible, even with the excellent job growth in the area.

A Mixed-bag in South and Midwest
Investors are mostly concerned with the Southern real estate markets. "People are skeptical of Texas markets in general because of overbuilding in both office and residential spaces," says Taysom. For instance, job growth in Dallas makes the market somewhat attractive, but with plenty of land and low barriers to entry, few people are buying. "And that trend is reflected in the pricing," he adds.

Markets in the Midwest are seen as being in relatively good balance. "Minneapolis, for example is attractive with its high barriers to entry, but it is an expensive area with high tax rates," Taysom says. In major cities with steady growth, such as Chicago, the downtown residential properties are selling quickly, while suburban markets are having a fair amount of capital being invested in office space.

Urban Revitalization Is Persuasive
"There is a return to robust economic health in some of the oldest and most densely populated downtown areas across the country," says Kelly. Urban revitalization in cities such as New York, Boston, Chicago, and Philadelphia is attracting office, hotel, and retail investment. In the downtown areas of San Francisco, New York, Boston, Chicago, and Washington, D.C., hotels are selling at rates of $150,000 to $250,000 per room for business quality, according to Kelly. The average price in the U.S., for hotels is $65,000 to $70,000 per room. "Center city hotels are actually selling for above cost to build," he added.