Commercial Investment Likely to Slow in 2006.

A lot of money has flowed into the commercial real estate sector in the last few years. Is this going to continue into next year? According to a forecast report put out by the Urban Land Institute and PricewaterhouseCoopers, the commercial real estate sector is likely to see more moderate growth in 2006. The important factors to watch for that could impact this outlook are consumer spending, energy prices, housing demand, job growth, corporate productivity gains and inflation, according to the report, which was released at the ULI's fall meeting in Los Angeles.

According to the report, "Despite improving market fundamentals and continuing capital infatuation with real estate, emerging trends interviewees signal caution over a looming transition to a period of more measured, possibly lackluster, performance."

However, this does not "translate into anything dire" and the forecast suggests that real estate will have an edge over stocks and bonds, at least in the near term. As for the impact of Hurricanes Katrina and Rita, they are expected to push up costs for construction materials and energy, creating an inflation threat.

"The nation's reduced refining capacity threatens to sustain record or near-record gasoline and home heating prices just as government economic stimuli - low interest rates and tax cuts - have lost some of their effect. Building materials can only become more expensive as the massive cleanup and reconstruction gear up, opportunely restraining development passions in slowly firming commercial markets."

Some of the investment patterns noted by the respondents include a number of buyers paying premium prices without considering the possibility of a market slowdown; a tendency for owners of well-leased, income-generating core portfolios to hold on to their properties; a decline in the availability of "value-add bargains"; and increasing interest in Asian investments.

Respondents advise holding on to full-service hotels, selling or holding apartments; holding warehouses; selling commodity offices; and selling retail properties. They also expect that in the course of the next real estate cycle, in 2010 and beyond, property markets will become more global and more public, and U.S. real estate markets will sustain the interest of various capital sources.

San Diego, for the first time in the report's 27-year history, ranks as the top investment market, pushing past Washington, which is now at second place, followed by Los Angeles. "Southern ...