Real Estate

If the global currency crisis that has rocked Asia, Russia, and Latin America was good for any U.S. industry, it was real estate. The financial crisis in Asia helped cool off an industry that was on the brink of overheating. When the Asian storm clouds began building last spring, lenders and investors began pulling back on speculative commercial and residential developments. At the same time, the plunge in interest and mortgage rates provided a needed shot in the arm to the residential market. "We managed to cut off the boom before it overshot," says Ray H. D'Ardenne, chief operating officer of Atlanta-based Lend Lease Real Estate Investments Inc. As a result, "We're going to realize a longer real estate cycle this time."

Thus, the real estate sector greets the new year with low interest rates, healthy demand, and inventory levels that are surprisingly small by historical standards. The biggest benefits have come on the commercial front. Coming off a 23% surge this year, U.S. construction starts are likely to rise only 5% this year, to 247 million square feet of office space, according to The McGraw-Hill Companies' F.W. Dodge Div. The value of those contracts, however, will rise 9%, to $27.8 billion, thanks to the tight office markets in many cities. Arthur J. Mirante, president of New York-based Coldwell Banker, believes those tight conditions will also allow landlords to raise rents by 5% to 10% this year. Hottest markets will be major tech and finance centers like San Francisco, New York, and Boston, while overheated Sun Belt markets like Dallas and Atlanta are most likely to slow.

NICE RIDE. The Asian crisis is having salutary benefits on the residential front as well: It triggered a flight to quality by foreign investors buying into Treasuries, mortgage-backed assets, and other securities. The shift in capital, coupled with the Federal Reserve's own moves to ease credit, helped reduce mortgage rates so much that housing affordability hit a 20-year high last year. That's one of the reasons for the 1.61 million new single-family and multi-family housing starts in 1998, a record year--and permits for new residential construction remain strong at the start of 1999.

While it will be hard for builders to match 1998's record construction, David J. Seiders, chief economist for the National Association of Home Builders, is forecasting 1.48 million starts this coming year. That would still be a sharp gain over 1996 and 1997.

Even though growth seems like a comedown from 1998's record pace, real estate veterans aren't complaining. Having lived through too many booms that invariably led to busts, most builders, lenders, and agents will be content to enjoy the ride for at least one more year.

Before it's here, it's on the Bloomberg Terminal.