Capital Still Flowing into Real Estate.

Pittsburgh -- Improvements are in store for all the property types this year, on account of continued improvement in the national economy and a sustained inflow of capital into real estate, according to PNC Real Estate Finance.

Nicholas Buss, a PNC REF researcher, cautions however, in the company's annual real estate forecast, that improving property market fundamentals - such as a rise in leasing traffic, increased uptake of office space and growing business confidence - could be "overshadowed by the direction of real estate capital flows in 2005."

Mr. Buss said, "Real estate today is more liquid than ever before, and by a wide margin. This weight of capital, and the competition it has created, pushed prices up and yields down."

Sales of institutional real estate jumped nearly 50% to $180 billion in 2004 and the commercial real estate debt market grew by 10% to $2.2 trillion as yield-oriented investors continued to be drawn to real estate "in record numbers."

Although he expects that the strong flow of capital to real estate will continue in 2005, Mr. Buss also notes that a combination of rising interest rates and decreased real estate "interest yields" could influence investor behavior.

He observed, "We saw in 1998 that capital can quickly flee a sector, even if that sector is performing well. Although considered to be an unlikely event yet in 2005, real estate must be cautious about potentially finding itself vulnerable if fickle investors chase better returns in another sector."

PNC expects the single-family market to be impacted by rising mortgage rates, in the mid-6% range, which could "take some of the ...