Office, Industrial and Hotel Sectors Should be Best Performers in 2006, According to Annual PNC Real Estate Outlook

PITTSBURGH, March 16 /PRNewswire-FirstCall/ -- Continued improvement in the national economy, though on a more measured pace, and robust infusion of capital into real estate should result in improvements in the economy-driven sectors this year, reported real estate industry expert Nicholas Buss, Ph.D., senior vice president of PNC Real Estate Finance, a member of The PNC Financial Services Group, Inc. .

Consumer spending continues to be the engine that drives the economy, but Buss cautions that several factors, including consumer debt, could cloud the picture this year.

"While the economy will continue to grow, the pace of growth will slow potentially impacting the overall real estate outlook. The risks include rising energy prices, a cooling of the red-hot housing market, an over- stretched consumer sector and an over-reliance on foreign investment," Buss said.

The more economy-driven sectors - office, industrial, and hotel - should be the best performers, while the consumer-driven sectors - retail, apartment, for-sale housing - will face more turbulence, according to Buss.

These findings are included in PNC Real Estate Finance's annual forecast, the 2006 Real Estate Outlook.

"Red Hot" Housing Market

Buss forecasts that the housing market has peaked and that activity will slow in 2006, but the pace of deceleration is expected to be orderly.

"The consumer is facing headwinds that can slow spending in the year ahead, most notable of which will be a slowdown, but not collapse, of the housing market. This limits what has recently been the consumer's primary source of equity," he said.

While the coastal areas should continue to dominate the housing market, some markets that have lagged during the current recovery process could re- emerge in 2006 driven by stronger job growth, including Atlanta, Dallas, Denver and the former tech centers with Austin and the San Francisco Bay Area leading the way. Many Midwest markets may lag as the domestic auto manufacturing industry slows considerably.

Commercial Property Types

The office segment could gain the most ground in 2006 with job growth driving the need for companies to lease additional space, according to Buss. The apartment sector will see improvement in leasing fundamentals and Buss forecasts that market conditions will tighten to the point where landlords will be able to see the ability to slowly raise rents once again. While a good year should be in store for the industrial sector, the primary risk remains the impact of on-going restructuring within the domestic auto industry.

Commercial real estate will continue to benefit from a strong influx of capital. "The investors' love affair with real estate is still very much alive, but the risk is that too can quickly change," said Buss.

New construction across all sectors continues to be impacted by rising demand for construction materials overseas - particularly from China and India. In addition to overseas demand, U.S. developers are challenged by significant domestic demand for materials for rebuilding efforts in the hurricane-ravaged Gulf Coast.

Sector Forecasts for 2006: Highlights from the 2006 Real Estate Industry Outlook include by sector:

* Office: For the first time in five years the office sector could move to the front of the pack. On-going recovery should ensure that investors will remain focused on this sector keeping prices high and yields low. Buss forecasts a measured improvement in fundamentals, with the national vacancy rate falling into the mid-13 percent range by year-end, demand continuing to outpace new supply, and real rental rate growth becoming a more realistic option in a growing number of markets.

* Apartment: The outlook for the apartment sector remains mixed. Buss said the national vacancy rate could be within the 5.5 to 6.0 percent range in a market looking for direction. If the condo market remains strong and condo converters remain active, apartment fundamentals will improve but for the wrong reasons - driven by declining supply rather than improving demand. A slowing of the housing market should be favorable for rental demand. However, this could result in increased supply as new projects built for the condo market wind up in the rental market and converters stop buying rental properties.

* Retail: Consumers face challenges from a number of different directions, yet it is tough to bet against them as a growing national economy, job growth and rising incomes will serve as a partial wind shield. Landlords and retailers must remain focused and flexible, having a game plan prepared and ready to implement if the market slows and consumers pull back.

* Hotel: The hotel sector should continue its steady pace of improvement - making it three years in a row of strengthening fundamentals. Uncertainty surrounding energy prices and the impact of a pull back in consumer spending on leisure travel top the list of concerns. Counter-balancing these will be the strengthening national economy and a healthier business sector supporting travel. Buss predicts room-night demand growth in the 3 percent range, enough to push occupancy higher to 64 percent.

* Industrial: The primary risk here remains the impact of on-going restructuring within the domestic auto industry, but it likely will not be enough to offset the positive influences of other areas of the economy, most notably trade flows. Buss expects the industrial vacancy rate to fall to the 8.5 percent range by the end of the year, however developers will respond to tighter markets and more widespread rent growth.

* Single-Family: Sales levels of new and existing homes could move into the 7.3 to 7.5 million unit range, still resulting in one of the best five years on record. The rebuilding of the Gulf Coast will bolster housing starts nationally. Worsening affordability issues in key markets such as California, Florida and the Washington, D.C. region may quickly put a stop to the double- digit price gains that have characterized these markets over the past few years.

PNC's proprietary Real Estate Market Research division publishes periodic reports on the state of the industry and the economy's impact on the property markets. For the complete version of the 2006 Annual Real Estate Outlook, call 412-762-1841.

PNC Real Estate Finance is a member of The PNC Financial Services Group, Inc. PNC is one of the nation's largest diversified financial services organizations providing consumer and business banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management; asset management and global fund services.

The information included in this news release was prepared for general informational purposes only and is not intended as specific advice or recommendations. Information has been gathered from third party sources and has not been independently verified. Any reliance upon the information provided is solely and exclusively at your own risk.