Rising rates could sack market recovery

While real estate investors generally express cautious optimism about industry performance in 2005, concerns over the economy and job growth coupled with the likelihood of higher interest rates are curbing expectations for a robust year, according to Emerging Trends in Real Estate 2005, a new report by the Urban Land Institute (ULI) and PricewaterhouseCoopers, LLP.

At the same time, “Interviewees almost without exception are confident that U.S. real estate markets can avoid scenarios that would crater property values,” notes the report, which is based on surveys and interviews with more than 500 of the real estate industry’s leading authorities, and is considered to be one of the longest running and most respected annual investment studies.

Emerging Trends in Real Estate 2005 anticipates that a key highlight of the coming year will be the race between improving fundamentals (occupancy rates, leasing rates, operating expenses, etc.) and rising interest rates. “Can real estate supply / demand fundamentals improve enough in 2005 and 2006 to offset the potential negative impact of rising interest rates on property values and pricing? Make no mistake, the race is on,” the report states. “For 2005, it all comes back to interest rates, the economy and job growth.”

The report, distributed during ULI’s annual fall meeting in New York, cites several factors that could impede economic expansion: federal budget deficits; the trade deficits; the weak dollar; unprecedented levels of consumer debt; inflationary pressures from rising oil prices; rising employer healthcare costs; choppy job growth prospects; queasiness over terrorism threats; uncertainly surrounding the Iraq war and the possibility of interest rate spikes.

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