Despite Shifting Tides, U.S. Commercial Real Estate Will Remain Unscathed, Thriving into 2006, According to Colliers International

Colliers Releases Twelve-Month Forecast, Providing Insight into the State of the Markets

Colliers International, the global real estate services firm, today launched its 2006 Real Estate Forecast, providing an in-depth look at the nation's commercial real estate market with predictions and top trends for the coming year -- specifically, the industrial, retail and office subsets.

According to the firm's research, the U.S. commercial real estate sector will enjoy another blockbuster year aided by considerable momentum going into 2006, which will continue to fuel growth in industrial, retail and office real estate.

General Overview

"The U.S. commercial real estate sector will be remarkably strong as we move into the New Year," remarked Ross Moore, senior vice president and director of market and economic research for Colliers International. "Even if the economy grinds to a standstill tomorrow, we have enough momentum and inertia to carry us through until at least mid-year."

Colliers predicts the office sector along with the industrial sector will clock substantial expansion in 2006 where vacancy levels are projected to drop while rents are poised to increase. On the office side, due to healthy job growth, demand for space continues to surge. Colliers also remains bullish on industrial, since manufacturing, imports/exports and industrial production are all pointing up. Finally, retail will continue to thrive, fueled by consumer spending, expansion into new markets and the revitalization of urban downtowns.

"We are well aware of the challenges the U.S. economy faces as we enter 2006, in the form of high energy costs, rising interest rates and an uncertain housing market," continued Moore. "But we also believe that because so many businesses are well-capitalized and financially secure, they are primed for expansion. This can only invigorate the real estate boom."

Real Estate Investment Sales Overview

According to Colliers' analysis of investment sales trends as we enter 2006, we are in the midst of the strongest sellers' market ever. Interestingly, real estate values will be driven higher by improving fundamentals -- not by cap rate compression. In terms of key cap rate trends to watch:
* Cap rates for the very best office real estate will remain in the
5.0-5.5 percent range

* Cap rates for the very best industrial real estate will remain in the
6.0-6.5 percent range

* Cap rates for the very best retail real estate will remain in the
5.5-6.0 percent range

* Cap rates for the very best apartment real estate will remain in the
4.0-4.5 percent range

* The improving risk/return profile of real estate will continue to apply
downward pressure on cap rates



With alternate investment returns still stagnant, coupled with the lag effect of capital flows, real estate will again be the recipient of significant investment capital in 2006. However, it is important to note that private capital, which recently has been one of the most active buyer groups, will be less dominant in 2006 as these groups shift their focus to secondary and tertiary markets -- and that institutional investors (e.g., pension funds) will be the much bigger buyers in tier one markets during the coming year.

Small value-add investors will be attracted to these smaller suburban and tertiary markets -- as well as Class-B product in Class-A markets. Core buyers will pursue Class-A real estate, while value-add buyers will pursue Class-B -- and Class-C real estate will effectively disappear for adaptive re-use.

In terms of supply and demand, improving fundamentals make vacancy valuable; moreover, supply will be kept in check by higher land costs, extended entitlement periods, restraints on financing speculative development and rising materials costs. In a handful of markets, Colliers anticipates a supply crunch sometime in 2007-2009, but rents will spike prior to this, in late 2006. These rent increases will occur despite decreased leasing activity, which will be somewhat restricted by ever-increasing efficiencies in space utilization.

"We're going to see lots of money flowing into real estate in 2006, with relatively inexpensive debt capital, motivated by poor returns in other investment sectors," remarked Moore. "Investors will be aggressive buyers of real property in 2006."

Real Estate Outlook and Trends for 2006

Colliers' complete forecast report is available upon request. A top-line look at trends and 12-month outlooks follows:

Office Real Estate -- Top Trends and 2006 Outlook

Trends
* Financial services, health services and professional and business
services will fuel the office market in 2006
* Call centers and data centers are staged to make a comeback
* A handful of markets (Manhattan, Southern California, Washington, DC and
South Florida) will act as the catalyst to push rents significantly
higher; these markets will be marked by rent spikes, and bidding for
office space will become more common
* Early lease renewals will continue in 2006
* Acute shortages of large blocks of office space will increasingly be
reported in 2006
* Class B office space will enjoy a renaissance in 2006
* High demand for investment properties will push prices above replacement
cost, even after accounting for rising construction costs
* Construction activity will increase as 2006 progresses
* Residential conversions will continue to reduce office stock in 2006

2006 Outlook
* Office markets are on target to register another robust year, at least
on par with 2005
* Tech firms returning to the market could be the "big surprise" in 2006
* New office development to increase by 60 percent but still well below
normal levels
* Vacancy levels to drop another full point to just over 13 percent
* Reports of critical shortages will be reported in some "sub-markets"
(e.g, Sixth Avenue at 49th Street, NYC; Newport, CA, to name a few).
* Office rents for abovementioned top tier markets to increase by up to 25
percent in 2006
* Despite rising interest rates, cap rates will show little change

Retail Real Estate -- Top Trends and 2006 Outlook

Trends
* Consumers continue to keep spending, driving the retail expansion
* Vacancy levels continue to drop and rental rates continue to gradually
increase along with higher land and building costs
* Land prices continue to climb, but will slow as the interest rates push
higher
* Lifestyle centers continue to dominate the new development scene
* Restaurants, Banks, Discount Retailers, and Home Improvement retailers
continue to lead the way and are typically the first retailers to enter
growth areas
* Cities are promoting wise land use planning, forcing developers to
become more innovative

2006 Outlook
* Retail market will remain robust, with sales growing at over 6 percent
in most sectors, especially the sectors related to housing (furniture,
appliances, home improvement, etc.)
* Despite rising interest rates, cap rates will show little change
* Retailers will continue to expand, placing greater emphasis on urban
market penetration
* New retail developments will continue at a fast pace; mixed-use
development will push retail into a new territory, while the urban trend
will infiltrate suburbia. People increasingly favor a sense of
"downtown" community over a generic asphalt strip center

Industrial Real Estate -- Top Trends and 2006 Outlook

Trends
* Distribution markets will stay hot, tied to the retail boom
* Infill development will increase, spurred by a dearth of available land
* Rail access will be increasingly important, partially due to rising fuel
prices
* Port markets, including those on the East Coast, poised for rapid growth
* Market for "big box" deals remains soft
* 5K-30K still strong (sales and leasing)
* Condo sales and conversions remain strong
* Continued disconnect between occupier and investment markets
* Plant closings at GM and Ford Motor to cause disruptions in auto-related
markets

2006 Outlook
* Industrial markets are on target to register another robust year, at
least on par with 2005
* New warehouse development to increase by 50 percent, but not enough to
alter market momentum
* Vacancy levels to drop another full point to under 8 percent
* Industrial rents to increase by up to $0.50 per square foot
* Land prices will continue to increase
* Despite rising interest rates, cap rates will show little change

About Colliers
Colliers International is a global partnership of independently owned commercial real estate firms. The organization's 9,141 employees span the world in approximately 250 offices worldwide. On a global basis, Colliers manages over 660 million square feet, and has revenue of over US$1 billion. For more information about Colliers International, visit http://www.colliers.com/.

Source: Colliers International
BOSTON, Dec. 19, 2005 /PRNewswire/