Speaking at a press conference, Mr. Bralower examined trends that are expected to affect the office, lodging and retail sectors in 1999.

"While 1999 may not be a boom year," he said, "real estate, equity and debt will remain solid investments. The markets have learned from past mistakes and are in a better position to manage the downside, while taking advantage of opportunities."

Among other trends in commercial real estate he noted are the following:
 

Regional Outlook

Overbuilding in the nation's cities was less of an issue, Mr. Bralower also said, than it had been in the past, because stricter controls were helping to manage growth.

In major Northeast cities, such as New York, Boston and Washington, D.C., Mr. Bralower noted that the underlying real estate fundamentals have remained strong, despite recent volatility in the capital markets. On the West Coast, he continued, the San Francisco market remains buoyant, and Los Angeles, which had lagged behind other markets, continues to improve.

In the Southwest, Atlanta and Dallas, may be more problematic, due to construction projects still underway. The Midwest should remain stable.
 
The Capital Markets in 1999

Steve Kohn, Sonnenblick-Goldman's Managing Director and head of its Capital Markets Group, predicted that "The public equity and debt markets for commercial real estate will be a lot less exciting in 1999 than 1998."  Since the decline in REIT stocks and the implosion of the
Commercial Mortgage Backed Securities (CMBS) market this summer, conditions have stabilized somewhat, although at significantly reduced valuation levels.

"The 10% to 15% drop in property values from the first half of 1998 will not be recovered in 1999.  With REIT stocks no longer valued at 30%+ premiums to net asset value, they will not resume their previous aggressive bidding on assets," Mr. Kohn noted.

The other most aggressive buyer in the past few years was the highly leveraged individual entrepreneur. Leverage above 75% loan-to-value levels is no longer readily available and more equity is required in transactions.  Greater levels of equity implies lower internal rates of
return which means previously higher targeted returns can only be achieved by lowering acquisition pricing.

Private equity remains plentiful -- mostly from pension funds -- as does lower loan-to-value debt for commercial real estate.  Assuming that there will be no further economic shocks from Asia and other major emerging markets (like Russia and Brazil), he said, CMBS spreads should
stabilize, and conduits, banks and insurance companies should continue to lend on sound properties.  Speculative new construction should abate in all but the tightest markets, and even in those, much more equity will be required than was 6-12 months ago.

Office Market - 1999

Most office markets around the country should remain strong in 1999, although slower projected economic growth will ease pressure on already low vacancy rates, resulting in slower rental growth and reduced demand for new construction, Mr. Kohn said.

Central Business District (CBD) markets should perform better than suburban ones, where new construction starts in 1998 threatened to result in not an excessive, but a significant surplus of space. According to various market reports, through the first half of 1998, CBD
construction completions totaled less than 500,000 sq. ft. nationwide, with approximately 7.5 million sq. ft. underway.  Suburban completions were 16 million sq. ft., with 60 million sq. ft. underway.  Much of the new suburban construction has occurred in Dallas, Atlanta, Denver,
Phoenix and Houston, markets often associated with overbuilding.

Investments in many CBD markets, such as New York, San Francisco, Boston and Washington, DC, are deemed safer and will continue to attract capital due to the longer lead times, higher costs and greater risks associated with development in center cities.  Investment demand for "just another suburban office building" will not reach the levels in 1999 that it had over the past few years, as pricing has hit depreciated replacement costs in most markets, Mr. Kohn noted.

Fundamentals in Lodging Industry Remain Strong

As is the case in many real estate sectors, the lodging industry is experiencing illiquidity in the capital markets, although industry fundamentals are extremely strong, noted Arthur Adler, Managing Director of Sonnenblick-Goldman Company's Lodging and Leisure Group.  "The lodging industry is expected to again generate record profits in 1998 with another strong year expected in 1999," he said.  Luxury and full-service hotels are expected to continue to post particularly strong revenue per room and profits as demand remains strong and barriers to
entry constrain development. 

Mr. Adler added, "We are extremely bullish on the lodging industry. Both the public equity and debt markets have rebounded with more conservative underwritings taking place, which bode well.  As a result, we expect an active transaction and financing market during the first
half of 1999.  We also believe that mergers and acquisitions activity, particularly for mid- and small-cap hotel REITs will rise during 1999. The economies of scale of combining REITs and the larger market cap of the combined companies will make for more attractive and liquid
investments for institutional investors." 

Institutional Investors to Buy Shopping Centers

Andrew Oliver, Sonnenblick-Goldman's Managing Director of Retail Sales and Financing, predicted that institutional investors, including pensions funds, which had been primarily investing in REITs specializing in shopping centers, would step up direct investments in shopping centers during the coming year. Their primary targets will include top tier regional malls and neighborhood grocery-anchored centers in prime infill locations, near attractive suburban locations.  Large REITs will remain active in acquiring shopping centers and could undertake joint ventures with pension funds. 

The following underlying fundamentals in the retail business will result in investors being more reluctant to invest in marginal properties:
 
 

Sonnenblick-Goldman Company is the nation's leading independent real estate investment banking firm.  Founded in 1893 to serve the financing needs of the real estate industry, Sonnenblick-Goldman Company provides a full range of real estate financial services including debt and equity placements, sale/lease-backs, joint ventures, brokerage and other real estate advisory services.  Headquartered in New York, Sonnenblick-Goldman Company maintains regional offices in Los Angeles, San Francisco, Miami, Washington, D.C. and Denver.