Focus on Investment Conditions: Something Has to Give--Or Does It?(Insider's PERSPECTIVE‪)‬

AS THE NEW YEAR GETS UNDERWAY, MANY OF US ARE TAKING stock of the economic outlook for the year ahead. We've watched as the U.S. economy has demonstrated its resilience over and over again during the last 5 years. It has survived the bursting of the dot.com bubble, major terrorist attacks on U.S. soil, wars in Afghanistan and Iraq and the ongoing war on terrorism, and corporate and accounting scandals, along with numerous smaller shocks. We knew, however, with Hurricanes Katrina and Rita late last summer and higher gasoline prices that the strength of the consumer would be challenged. Our concerns have been whether the business sector would prove to be strong enough to pick up the slack as consumer spending faced strong head-on challenges and whether inflation could be held in check in a rising interest rate environment. These shifting currents create quite a balancing act for the economy and reflect just a few of the challenges impacting real estate and other investments. In looking at the strengths and weaknesses in our dynamic economy, real estate has offered outstanding returns as compared to the stock and bond markets. However, the new challenges we are facing give rise to a host of new concerns related to real estate performance. Will consumer spending slow, and how will the retail property sector be affected? How will a reportedly slowing housing market affect apartment returns? Will business hiring continue and will rents for office and industrial space increase? With capitalization rates so low, what will drive returns? And more importantly, will real estate returns in 2006 be significant enough to take on the risk associated with this asset class? Given these imbalances, it seems that something has to give--but does it?