Real Estate & Construction

Many commercial properties will be at a premium, while the aging housing boom will dip below last year's heady highs

Herbert R. Barnett and his wife, Allison, were reasonably happy with their cramped condo in suburban Chicago. Then, last May, an ad arrived from a nearby housing development. After two months of touring the place and crunching numbers, Barnett signed a contract for a new 3,800-square-foot home. "We weren't even thinking about buying a house when the postcard came," says the 42-year-old professional magician. Presto! Another home sale.

The housing industry will need to pull more such rabbits out of its hat in 1997 to match its performance of the past year. With consumer debt high, the inventory of unsold homes climbing, and growth in new households expected to dip in coming years, the housing boom is showing signs of old age.

On the other side of the equation, the combination of falling interest rates and rising incomes is stoking demand from millions of first-time buyers--and sparking unexpected traffic from trade-up buyers like Barnett. As a result, the 1997 housing market should fall just shy of 1996's sizzling pace of 1.16 million starts and a record 4.1 million resales. John A. Tuccillo, chief economist for the National Association of Realtors, predicts 3.8 million resales, a 6% drop, and 1.13 million housing starts, or 2.6% fewer than in 1996. He forecasts a 5% drop in apartment construction, to 291,000.

The high end of the commercial real estate market remains fairly strong. With lenders reluctant to fund new construction during most of the 1990s, many markets have been hard-pressed to meet the space demands created by the healthy economy. That shortage, in turn, is good news for builders, who have been sitting idle. According to The McGraw-Hill Companies' F.W. Dodge Div., developers are expected to break ground this year on 140 million square feet of office space, up 12% over 1996 and 24% over 1995. Dodge estimates the value of new starts at $18 billion, a 16% jump.

All of that new space doesn't exist yet, of course, which is why vacancy rates for "class A" commercial space remain well below 10% in hot markets like Seattle, San Francisco, Boston, and midtown Manhattan, not to mention the choice suburbs (box). Some landlords are expected to shove through rental hikes as steep as 15% in the year 1997.

The lower end of the commercial market is a different story. With many employers demanding state-of-the-art communications systems and flexible workspace, much of the older office stock has been rendered obsolete. But real estate executives hope the strong demand on the high end will work its way down. Some developers are reducing the surplus of outdated office buildings by converting them to hotels and apartments. A neat trick, indeed.

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