New York - Market participants will either be net buyers or net sellers of real estate depending on their view of interest rates, said Susan Hudson-Wilson, founder and CEO of Boston-based Property & Portfolio Research Inc. The remarks were made at the opening session of the Commercial Mortgage Securities Association's 10th Annual convention, held last week in New York.

Hudson-Wilson said that conventional wisdom on interest rates is "simplistic," as it assumes that rising interest rates will have a negative impact on the performance and value of real estate, when it could actually be positive or negative depending on the reasons for the rise. For instance, as interest rates rise people usually assume that cap rates on property values will fall. However, this will depend on various factors, including whether interest rates are rising due to positive or negative reasons. She said that participants should have a definite take on the issue because this will determine their strategy on whether to sell or buy into the sector.

In her presentation, Hudson-Wilson also discussed her view on the different property types. In apartments, she said that there is very little renter household growth because the largest cohort of renters is shrinking. One reason: Many good-quality renters have become homeowners, which also has some negative credit implications for the sector. Pricing in the multifamily sector has also been fairly aggressive, with many apartment complexes being converted into condominium-type dwellings to justify the high prices that might not be met with demand.

Meanwhile, the office sector had its share of problems with supply risk expected going forward. She said that out of the 180 million square feet of existing office space nationwide, only 80 million square feet is currently needed. Going forward, only 50 million square feet will probably be utilized. She said that the demand side should be considered in looking at the office sector.

Retail is also challenging because of the diminishing number in the 35- to 54- year old age group, which is the portion of the population who earns and spends the most. This will remain problematic unless the baby boomers continue to spend, which is not expected.

The "wild card" for hotels is not the economy but terrorism, said Hudson-Wilson. However, the sector is expected to outperform all the others apart from this risk.

Although many are buying into the notion that the market is through with the dark side of the cycle, there are still some areas of the country where real estate fundamentals are not coming up rosy. She mentioned, for instance, the Midwest, Boston and San Francisco as problematic areas. However, some cities have improved as migration has spurred the creation of employment opportunities. She mentioned Phoenix, Las Vegas, Tampa, Orlando and Atlanta as some of the places that people are now choosing to live and where there is a corresponding economic boom as a result of the migration. Hudson-Wilson said that with the current scarcity of jobs, they are following people and not the other way around. - KS

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