Real estate should remain a good investment for 2005

It’s November, the end of the year is soon upon us.

My partner and I will be sitting down to budget/forecast 2005. Norton Asset Management Inc. is a small firm (10 full time employees). We have three areas of business: brokerage, 40-50 percent; advisory, 30 percent; and corporate facilities services, 20 to 30 percent.

One component of our budget forecast is the momentum of the assignments and projects that we are actively working on. We can forecast the timing of this work to an 80 to 90 percent confidence level. We also have potential work/projects in our pipeline. We know if we keep stuffing things into the pipeline that they eventually will come out the other end. The challenge is we are never exactly sure when. Sometimes it is a dribble, sometimes a steady flow, and sometimes it gushes out, goes dry, then gushes again. I am fond of saying of our pipeline that what goes in does eventually come out, but we cannot say when, because both the diameter and the length of the pipe change routinely and we have no control over that.

Another element of our business forecast is a projection of the overall economy — global, national, regional and local.

For instance, we are still hearing that New Hampshire’s economy will continue to lead New England in the coming years. However, New England will slightly trail the nation as a whole. Specifically, these projections are focused on job growth and gross state product (a subset of GDP). Even so, both New Hampshire and New England are slowing down.

The region’s strong dependence on high tech is both a blessing and a curse. When times are good, the tide rushes in and floats all boats. But when it goes out, it tends to stay out for quite some time. In this sense it is not similar to a tide with regular predictable cycles but more like the level in a lake that fills up in the rainy season or post-winter snow melt runoff but is drained down in the summer heat and/or drought.

Globally and locally

The New Hampshire High Tech Council held a program last month with two featured speakers – economists Russ Thibeault of Applied Economic Research in Laconia and Ross Gittell of the University of New Hampshire.

Ross spoke repeatedly of the good news and bad news components. New Hampshire’s high-tech sector was 40 percent semiconductors and instrumentation (witness Celestica, Flextronics and others). The forecast is for slow growth, but in software development, computer systems design and applications do not look for Celestica and Flextronics to return to Pease. That portion of high tech is going overseas — no ifs, ands or buts about it.

Dean Kamen spoke of his recent trip to China. He concurs. He feels we need to get our young people passionate about technology and finding solutions for problems. His US FIRST robotics competition is one such effort. A partnership with colleges and universities is another. The state university system is working diligently in these areas, including nanotech, but Dartmouth and others are too.

I previously wrote about economist Jeff Thredgold’s summary of the economy as being lethargic. We need to spur ourselves to take initiatives and make some things happen. However, we don’t operate in a vacuum. A year ago if you had looked at the pundits’ projections you would have read dire pronouncements, or gloomy ones at least. But global economies still move along.

In fact, global growth is quite strong, and despite a surge in energy costs inflation remains low in historical terms. But the U.S. dollar is less strong (dropping 35 percent against the euro). The U.S. savings rate is shrinking. The war in Iraq has both ongoing fiscal and political costs. Our national deficit is funded by government bonds bought largely by foreigners. Oil prices hover around $50 a barrel. It is estimated that $8 to $12 of the current oil prices reflects anxiety about potential disruption of oil flows.

All of the factors have led to a real estate slowdown, but there has been good news — almost a million square feet of U.S. office space was absorbed in 2004, the best performance since December 2000. But there are multiple millions of square feet still vacant.

Regionally, we probably have a 20 percent vacancy rate. Even so, investors continue to pour money into real estate. In 2004 there was a 43 percent increase in the sale of multifamily investment property, despite rising vacancies. Why? Lack of better alternatives.

The Real Estate Research Center reports that even though real estate is delivering historically low absolute returns, the downward pressure on the returns on most investments makes real estate an attractive buy.

So do we expect to be busy in 2005? Yes. Leasing will be moderate, but low interest rates brought many buyers to the market, and investors are seeing value and opportunities by acquiring former manufacturing facilities and converting them to commercial uses. We are fortunate to be able to select a limited number of listings and assignments. We are a small shop with a tight focus. So given our pipeline and a general sense of the market we expect an increase in brokerage revenues in 2005. nhbr

Bill Norton is president of Norton Asset Management. In addition to his active brokerage work, he is a Counselor of Real Estate. He can be reached at

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