The multifamily rental market in areas with limited growth capacity is the real estate sector most likely to weather the current economic slowdown, according to real estate experts assembled by the Urban Land Institute, a nonprofit education and research institute located in Washington, D.C.

The outlook for real estate investment and development opportunities was discussed recently at ULI’s Spring Council Meeting in Minneapolis during a session including Susan Hudson-Wilson, chief executive officer, Property and Portfolio Research, Boston; and Frank Marro, managing director, Partners Group, GE Capital Real Estate, Alpharetta, Ga.

The overall need for more housing units, particularly housing affordable to middle-income workers, is keeping the multifamily rental market strong despite the generally slower pace of the economy, the panelists said.

“Nothing will do great during a slowdown. Every class [of real estate] will be affected. But the multifamily market is a safe haven for investors,” Marro said. “If you are building a quality product in a decent location, you’d have to screw up pretty badly not to make money off of it.” Historically, the number of renters has increased during times of slow economic growth, he noted.

ULI’s mid-year Real Estate Forecast lists multifamily rentals in the middle-income, high-income and low-income categories as having the most potential for attractive rent increases. The forecast notes that development prospects will be strongest for housing in general: it ranks higher-priced, single-family homes as having the most potential, followed by master-planned communities, multifamily rentals, infill housing, middle-income detached housing and second/vacation homes.

According to the panelists, the real estate industry as a whole is more ripe for investment than development. Markets with the most potential for investors are those with limited capacity for more development, due to factors such as high land prices, geographic constraints, and zoning restrictions, they said. Boston, New York, and Los Angeles, all of which were included in ULI’s forecast as “most-favored” investment markets, were cited by the panelists as promising markets. Although the forecast listed Washington, D.C. as a “most-favored” area, Hudson-Wilson cautioned that Washington could be less promising because it has fewer development barriers and is therefore more prone to becoming overbuilt.

Atlanta was listed in ULI’s forecast as a “least-favored” market due to oversupply in many market categories. “What’s hurting Atlanta is traffic. Every project must factor in how it will be affected by traffic, or how to avoid traffic,” Marro said.

Atlanta is likely to be the “big test” for whether the movement back to downtown areas is a long-term trend that supports the development of higher-end housing, he noted. “If it (the development of infill housing and mixed-use projects) does cause less commuting, this could indicate something much bigger,” he said.

Retail
ULI’s forecast lists regional malls and power shopping centers in the real estate categories listed as having the least potential for profit, due to an oversupply of retail product. However, the tendency by the investment community to shun retail could open up some opportunities for the savvy, Hudson-Wilson said.

“The underlying demographics support retail. There are a lot of people out there in their peak spending years,” she said, citing statistics that baby boomers typically spend an average of $45,000 a year on goods and services, followed by echo-boomers, the children of baby boomers, who spend an average of $35,000 a year. Despite the economic slowdown, these people are likely to continue spending, Hudson-Wilson said. “They will rent and they will buy,” she said.

Marro noted that while retail tends to be overbuilt in outlying areas, it is undersupplied in inner-cities. The development of more retail projects including grocery stores in downtown areas is an indicator of the movement back to cities, he said.

Office Market
In terms of the office market, the shakeout in the technology market is bringing rents and prices down to a more realistic level, Hudson-Wilson noted.

“The fallout is not a bad thing. It’s causing more rational thought. Investors who did not invest or develop at inflated levels should be okay,” she said. Some of the “flex space” rented to dot-com companies who have since closed could be converted to residential use, Hudson-Wilson noted.

Because the economy is unlikely to head into a recession, real estate investment opportunities are available for investors “who keep their heads,” Hudson-Wilson said. In fact, overall investment in real estate is likely to pick up, as people look outside the stock market for investments, she noted.

The past months’ downturn in the stock market “has educated people about the dangers of investing in too much stock,” she said.