2002 Real Estate Forecast from USC Lusk Center

USC Lusk Center for Real Estate

December 19, 2001 Contact: Francie Murphy (858) 350-5152 [email protected]

LOS ANGELES -- Fallout from the September 11 terrorists attacks will severely impact the real estate industry through next year as corporate America grapples with a shift in real estate strategy following massive layoffs, high-profile bankruptcies and a drop in consumer spending, according to Stan Ross, Chairman of the Board, USC Lusk Center for Real Estate (www.usc.edu/lusk). Ross advises real estate owners, investors and property managers to develop entirely new business models to reflect the corporate changes in planning for office, industrial and retail space. He also cautions real estate firms to align their business strategies with their corporate clients to reflect the need for heightened security, the rise in insurance premiums and a tightening of capital.

"Companies are more concerned than ever with the safety, stability and continuity of their operations," Ross points out. "Businesses that choose to scatter their operations among multiple suburban settings will spend more on building security and less on amenities. Owners and property managers have to collaborate closely with tenants to assess risk exposure in new and existing buildings, and to decide who will absorb the costs of added security personnel and monitoring devices plus rising insurance premiums." He adds that building owners may be able to offset some of these new costs by trimming operating budgets.

Ross believes that ultimately there will be a legislated resolution to the issue of insurance coverage for terrorist risks but in the meantime, "financing for new development will be impacted as lenders wait to see when terrorism coverage will be available from insurers," he cautions. He feels the institutional players will not overreact to the insurance shortage, however, "because they understand this level of risk and continue to have confidence in real estate as a financial instrument."

Ross predicts more alliances and partnerships of real estate services firms, security agencies, architects and engineers could be formed to combine resources in designing and developing security systems for new and existing structures. Since all levels of government will increase spending on security in public transportation and meeting places, he warns, the added costs might filter down to building owners via higher property taxes or special assessments.

Ross says the real estate industry needs clear vision, sound planning and strong execution to deal with the new and uncertain environment that we are all living in. "It is time to design the ‘new world plan.' Firms have to be flexible with their business plans in the next year because the real estate industry has a responsibility to get the country back on track," he adds.