Rising-Tide Economy Lifts Real Estate

In Greenville, S.C., the housing market is so hot, seven national homebuilders are slapping up new subdivisions as fast as the carpenters can load their nail guns.

In Aurora, Ill., luxury apartment complexes, begging for renters two years ago, are now filling up.

And, on Route 128 near Boston, high-tech corporations seeking office space are finding rents rising and leases scarce.

While the record-setting stock market has garnered all the headlines, the real estate market is now on a gallop as well.

Land prices are rising, architects are dusting off plans for new office towers as vacancy rates are tumbling, and home prices are ticking upward.

The recovery is taking place in virtually every part of the country, except the Northeast where the economic recovery has been slower. Real estate executives say most facets of the industry are on the cusp of a boom.

Comparing the real estate market to the stock market, Carl Kane, a real estate consultant at the accounting firm KPMG Peat Marwick LLP says, "We have not broken the 8000 mark, we're now at the 7000 level."

Driving the real estate market is the national economy, which continues to throttle ahead without any major signs of inflation.

Last week, the government reported Industrial Production rose a modest 0.3 percent. Capital spending is continuing to increase capacity. Last Thursday, a survey by Dun & Bradstreet Corp. found construction executives are expecting a strong third-quarter expansion.

This economic good news is now giving the real estate industry its fuel. "Business is spending, and new corporations are forming. So people need space, and there is a limited amount of space out there," says William Wedge, senior vice president for Boston Properties.

His firm, for example, has real estate along Boston's Route 128, a high-tech corridor. Mr. Wedge says the properties are full. The company is building a new speculative office tower, which has already been snapped up. "We're getting the highest prices we have ever had for suburban space," he says.

Full buildings, rising rents

Such stories are common in real estate circles. Two years ago, the national vacancy rate for apartment houses was about 10 percent. Today, it's at 4 to 5 percent.

That's the case in the Illinois town of Aurora, where MIG Realty Advisors manages and owns a 300 unit apartment complex. The vacancy rate for the complex, which rents to people who work in downtown Chicago's Loop, is down to 4 percent. "That's the difference between a profitable and a nonprofitable business," says Larry Wright, president of MIG, which is based in West Palm Beach, Fla.

As space fills up, rents are rising - in some cases by double-digit amounts. Brian Bowen, the chief executive officer of Hanscomb Inc., an international construction consulting firm, has watched his own rental expenses rise in the 15 cities his company is located. In the past 12 to 18 months, his annual rental costs have risen from $600,000 per year to $800,000 per year. "It's a good indicator that demand is beginning to outstrip supply," he says.

In the Greenville/Spartanburg, S.C., area a survey earlier this year by the National Association of Realtors (NAR) found the median sales prices of existing single-family homes rose by nearly 16 percent from a year earlier. "It's definitely a seller's market for any reasonable price," says Milton Shockley, president of Century 21 Shockley Youngblood Inc.

Nationally, home prices are rising. According to NAR, the national average is up 4.8 percent compared with 4.5 percent last year.

But there are some hot spots, particularly in the Midwest and the South, where home prices are rising by about six percent a year. They include Mobile, Ala., the Aurora/Elgin, Ill., area, and Colorado Springs, Colo.

According to NAR figures, Las Vegas, Nev., which was booming, has started to cool off, as has Boston, where prices actually fell 2 percent from last year.

A boom - and some dangers

Corporations are also in the market for space. According to a recent survey by the Norcross, Ga.-based International Development Research Council, 64 percent of senior corporate real estate executives polled said their firms would need more office space in the next two years. But unlike past real estate booms, "You won't see as many trophy buildings," says Richard Kadzis, marketing director of the firm. Instead, he says, they will be more modest properties with more flexible leases.

The real estate rebound is attracting attention from the banking and finance industry. A lot of capital is available for construction. "If a borrower can't get financing today, it must be one terrible deal," says Mr. Kane of KPMG.

But to some observers, the prospect of too much money chasing real-estate deals sounds like the 1980s. Back then thrift institutions, eager to increase yields on their portfolios, shoveled money to real estate developers. It took years for the industry to recover.

Cain says this time it's different. There are tougher zoning and environmental codes. Lenders are more sophisticated. Prices are starting from a lower base. But, he admits, right now the industry is "euphoric."