Plunkett Research^®, Ltd.

Plunkett Research reports ten real estate and construction industry trends that will dictate the mood of the industry through 2010, impacting not only the real estate industry but also the global economy as reported in Plunkett’s Real Estate & Construction Industry Almanac, 2009 edition.

“Real estate, the residential sector in particular, has been making bleak headlines around the globe in 2008 and 2009. By early 2009, important trends were developing that will shape the real estate industry of the near future,” said Jack Plunkett, CEO and Editor. “The ten trends we have identified will have broad effects on the industry and beyond.”

Plunkett’s ten real estate and construction industry trends to watch for in 2008 and 2009:

1)   Subprime and Alt-A Mortgages/Foreclosures Burn Overburdened Homeowners - The housing, lending and construction markets enjoyed booming times through early 2006. However, in 2007 and 2008 the picture turned black. Mortgage lending became so aggressive that virtually anyone could purchase a home, even if they had poor credit, modest incomes, high levels of existing debt and/or little money to use as a down payment. Exotic new types of mortgages, designed to make it easier and easier for buyers to borrow, flourished. Now, the mortgage business and related sectors are paying the price. Non-payment on these mortgages and plummeting values of the houses that were used as collateral have devastated the lenders and investors that hold the mortgages. Lenders have lost hundreds of billions of dollars, and the crashing values of mortgage securities touched off the global financial crisis of 2008. According to First American CoreLogic, 19.8% of American mortgage holders owed more on their mortgages than their homes were actually worth.

2)   Real Estate Goes Online - An estimated 80% of homebuyers go online to research the market before purchasing. Additionally, an increasing number of people are turning to the Internet to apply for mortgage pre-approval before deciding upon a house. Potential homebuyers are now able to access a multitude of information via the Internet on topics such as home value estimates, recent sales activity, tax information, property listings, title history and more. There are also web sites that connect the buyer to the seller directly, thereby eliminating the need for an agent. More and more, savvy real estate agents are utilizing web sites such as YouTube and Facebook, blogs and text messages to reach younger, first time buyers. Some realty firms have even taken to hiring agents in their 20’s to help reach this new high tech buyer.

3)  Homes and Commercial Buildings Go Green - Increasingly, homebuilders across the U.S. are constructing homes in accordance with the National Association of Home Builders’ (NAHB) “green” specifications. These specifications require resource-efficient design, construction and operation, focusing on environmentally friendly materials. Today’s much higher energy costs are spurring this trend. The Green Building Council report said that, as of early 2009, approximately 35,000 projects were participating in the Leadership in Energy and Environmental Design (LEED) system, comprising more than 4.5 billion square feet of construction space in 91 countries and all 50 U.S. states. Furthermore, the NAHB estimates that 10% of new homes in the U.S. will be eco-friendly by 2010. In Europe, the EU has mandated that member states revisit building codes every five years and create standards of energy efficiency. Elsewhere, nations such as Japan that are focused on becoming much more energy-efficient are emphasizing the use of green methods in new construction.

4)  Real Estate Markets in China and India Fall - The global economic crisis which began in 2007 wreaked havoc on the real estate markets in China and India in 2008 - 2009. According to the National Bureau of Statistics in China, housing prices fell for seven consecutive months from August 2008 through March 2009. Property values in Shanghai rose a staggering 300% between 2003 and 2006. However, as of early 2009, the National Bureau of Statistics reported a rise in the volume of real estate sales of 8.2% compared to that of the previous year. Despite recent growth, commercial property sales continue to plummet, down to 13.1%. In India, analysts report that prices fell between 10% and 20% throughout most parts of the country. In spite of falling prices, the cost of housing in the cities of Mumbai and Delhi remain too expensive for middle class consumers. India became the global capital of business process outsourcing, which meant that millions of Indians were enjoying a new life in the middle class. Beginning in early 2008, western companies began cutting back on their outsourcing efforts as part of overall cost reductions which heavily impacted the real estate market. Developers now are faced with falling prices and increasing difficulty in obtaining funding.

5)   Apartment Houses Face Higher Vacancy - Apartment developers, particularly in the high-end to luxury range, were facing softer rents and higher vacancy rates from 2003 through 2004. Renters by the millions turned into house buyers, lured by mortgage plans with low or no down payment and house payments that were suddenly lower than rental payments thanks to historically low interest rates. The tide turned, however, by the end of 2004 when interest rates began to rise and, more recently, homeowners with subprime mortgages in default began to be forced out of their homes. With the mortgage crisis of 2007-2008, apartment living became more popular than ever as some people lost their homes and others were reluctant or unable to buy. According to real estate research company Reis, Inc., the top 79 U.S. rental markets saw vacancy rates escalate to an average 7.2% in the first quarter of 2009. The rise occurred despite the fact that landlords reduced asking rents by 0.6% in the first quarter.

6)   Mixed Use Developments Go Vertical - Mixing office, retail, residential and entertainment space in one location is an idea on the rise. According to a study by Charles Lockwood, a real estate historian and author, these mixed use spaces often outperform standard suburban real estate in office and retail lease rates, residential rents, retail sales, hotel room occupancy rates and property values, both on-site and in surrounding areas. All this multi-use bounty comes at a price, however, since building these 24/7 communities costs more. Design is more complex because retail needs are often at odds with residential needs. It’s also difficult to find the right mix of high- and low-end retail tenants. Residents need groceries and dry cleaning far more often than luxury jewelry or clothing, making the right mix of tenants a top priority for developers. The vertical trend is expected to dominate built-out suburban cities with set boundaries over the mid-term and beyond.

7)   Commercial Construction Looks Promising in Some Sectors/Commercial Mortgages are in Trouble and Vacancies Soar - The U.S. recession is hitting commercial real estate in the form of increased vacancy rates, lower property values and delinquent commercial mortgages. The office space vacancy rate in the U.S. at the end of 2007 was 12.4%, up from 12.1% in 2006. In 2008, vacancy rates rose further to 16.7%, according to research firm Reis, Inc., with vacancies expected to continue to grow. Part of the reason for the rising vacancy rates is that many tenants are planning to maintain or cut staff numbers in response to lower revenues. Also, consolidations of the business locations of tenants due to mergers, and a long list of major bankruptcies, particularly in retailing and financial services, are putting downward pressure on commercial property rentals. Commercial mortgage delinquencies and foreclosures will rise over the short-term, and funding for speculative commercial projects remains extremely difficult to obtain. For the mid term, however, construction spending for certain sectors will fall, due to high unemployment, changes in consumer spending habits, difficulties in the banking and automobile industries, and a close scrutiny by corporations on their budgets for office and factory space.

8)   Hotel Occupancy Rates Fall/Pod Rooms Grow in Popularity - In 2008, hotels started to feel the pinch as high gasoline prices and a slowing economy kept more and more travelers at home. According to Smith Travel Research, U.S. hotel occupancy levels were down about 5% for 2008 from 2007. Especially hard hit are destinations reached only by air such as Hawaii. With corporate travel budgets being slashed, hotels are responding with new, cost effective room alternatives, especially in Europe and Japan. Busy travelers can now book tiny rooms or “pods” that typically measure about 100 square feet (some as small as 65 square feet) in size for the night or just a few hours to rest and freshen up. Rooms generally have a small bed, flat screen TV and tiny bathrooms (some offer shared bathrooms), and windows, if there are any, may open onto a corridor instead of outside. The pod business model is similar to discount airlines in that only the basics are available and low prices are of supreme importance.

9)   Global Housing Markets Crashed and Remain Soft - The crumbling of home prices worldwide may have started in the U.S., but the financial foundations of housing markets, mortgages and prices were weak and ready to collapse in many major markets worldwide. In the U.S., Canada, Australia, Europe and elsewhere, mortgages were much too easy to obtain, appraisals were far too generous and demand was clearly stoked by over enthusiastic investors. By some criteria, house markets in Ireland, Spain and the U.K. had become even more ridiculous than those in the U.S. As of the beginning of 2008, residential real estate markets were suffering in places as diverse as India, Denmark, Spain, the United Arab Emirates and the U.K., thanks to overbuilding. The situation continued to deteriorate throughout 2008 and into early 2009. The result in many cities is crashing prices, massive numbers of foreclosures and plummeting new construction starts. In the most overbuilt markets—those in which a high percentage of purchases were for investment purposes rather than for primary residences—it would be very surprising to see house prices stabilize before 2010. The overbuilding problem is compounded greatly by several factors, including more stringent requirements for mortgage approval, the economy is softening in many markets worldwide; consumers are already awash in debt and home buyers are extremely wary of paying too much in a declining market.

10)  Home Sales Slow but A Rebound is in Sight - In response to crashing demand, home prices fell significantly. The National Association of Realtors (NAR) reported a drop in median existing U.S. home prices to $218,900 for 2007 (from the 2006 level of $221,900), the first annual fall since the Great Depression. Prices fell further in 2008 to $198,100. The showed an average price drop of 19.9% in a study of 20 major American cities for the 12 months ending December 2008. Homes in some stage of foreclosure or default are also skyrocketing, up 81% in 2008 over 2007 according to RealtyTrac, an online source for home foreclosures. However, in a growing number of these cases, lenders are agreeing to accept a mortgage payoff that is less that face value, also known as a “short sale.” Buyers are finding tremendous bargains in homes, especially in the foreclosure market. As of early 2009, existing home sales saw a glimmer of hope in a modest rise of 5.1% in the U.S. for the month of February.

Additional information is available in “Plunkett’s Real Estate & Construction Industry Almanac 2009”, as well as on our web site, www.PlunkettResearch.com.

ISBN: 978-1-59392-137-8

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