On Jan. 28, President George W. Bush gave his seventh and final State of the Union address to the American people and the joint Houses of Congress. During the hour long speech, he spent a good five minutes defining America’s need to “pioneer a new generation of energy technology” and “reverse the growth of greenhouse gases.”

This from a president who long argued that more evidence was needed to determine whether manmade greenhouse gases were a threat to the global environment and who is viewed as a friend to the coal and oil industries.

He then spent the larger portion of that address confirming his administration’s resolve to advance the cause of liberty and turn back the tide of terrorism.

Not in the running for this year’s presidential election, he must have missed the polls showing that the economy is the most pressing issue among voters. He spent approximately three minutes glossing over an economy headed toward recession and a housing market in which foreclosure rates have skyrocketed in just one year—according to ABC News, 1.3 million properties faced the possibility of foreclosure in 2007, a 79 percent increase over 2006.

While the government has acted to ease the sagging economy and the subprime market fiasco, many believe it is only a temporary fix and won’t stem the growing number of Americans forced to foreclose, any time soon. For example, the Center for Responsible Lending reports that the Treasury Department’s plan to streamline loan modifications will affect only about 3 percent of outstanding mortgages with adjustable interest rates.

A day after the president’s address, the House passed a $146 billion stimulus package that includes tax rebates and business incentives to spur economic growth. But that must first pass through the Senate whose Democrats created a separate package that includes $500 million for housing relief and a higher price tag overall. It may be some time before there is an agreement.

Yes, job growth is slow, retail spending is down and the dollar is looking pretty dour globally, but it’s not all as bad as it sounds.

Despite consumer caution in retail during the latter quarter of the year, commercial retail estate advisory firm Grubb & Ellis predicted that retail will rank above office and industrial interests among real estate investors in 2008.

And for those working in the brownfield market, the forecast seems to be one of stability.

“The nice part about real estate is that it’s cyclical. Everything is going to come back,” says James Mayer, real estate attorney with Holland & Knight.

Brownfield News & Sustainable Development spoke with Mayer and Amy Edwards, partner with Holland & Knight, to get their take on trends in the real estate market for the coming year, and the outlook wasn’t quite as scary as one might think.

Mayer admits he was on board the recession train when the first subprime issue hit, “when everyone panicked,” but now he views it with a conservatively optimistic eye, regarding it more as a slow down.

“The market hasn’t stopped like it did in the early ‘90s, when you didn’t know what was happening,” he says. “There are deals going on. I think there are people who see this market as a great opportunity. There are certain clients out there that are busier now than they’ve been in years.”

Mayer represents institutions buying and selling properties, a practice focused mainly on office, retail and industrial; markets similar to residential only in that they are currently in a buyers’ market.

At the turn of the millennium, when markets were peaking, multiple purchasers outbid each other for properties that could be sold for astronomical prices. Today, the economy has scaled back the number of purchasers forcing sellers to readjust property prices to more realistically meet the marketplace and, concurrently, revisit lower bids that they might previously have rejected.

The commercial and industrial markets are not going to be as robust as they’ve been over the last five to eight years, he says, but cash remains king, and buyers with money—whether debt or no debt, pension funds or REITs—will find opportunities. And to assure that those opportunities become realities, U.S. investors are looking abroad to China and the Persian Gulf, for example, for cash infusions, a trend that could lead to more joint ventures.

“You may find a player who has got the expertise in real estate development for example, but doesn’t have the cash. So you’re going to joint venture with a cash partner to do the deal,” says Mayer. “The question then is, within the joint venture agreement, who’s got the power, who’s got the leverage.”  

With capital in hand, the first question is, what’s the smart purchase in this shaky economic environment? Is it, as Grubb & Ellis suggest, the retail market?

That all depends on the investor’s interest and which markets are producing income at that moment in their location. As we reported in the August 2007 issue of Brownfield News, investment in industrial properties was, and still remains, a good bet in port cities, which are witnessing a rebirth.

According to Edwards, co-chair of Holland & Knight’s national environmental practice, brownfields remain fairly stable in this economic environment because they “encompass so many different types of sites in so many different places.”

“Wherever there still is a strong real estate market, there will be brownfield sites and there will be an appetite to redevelop those sites,” she says.

For example, in her region, the District of Columbia, there is a major boom in commercial building with a fair amount of condo development happening in and around the city. On the other side of the country, there is an emphasis on residential and mixed-use in California, where there’s a need for affordable housing.

“If you’ve got contamination, you’re dealing with brownfield sites. And developers still have been quite willing to look at those sites and figure out what needs to be done to turn them into productive new uses.”

Mayer agrees that the retail market is a hot commodity despite whether retail sales are up or down. He points to the International Council of Shopping Center’s (ICSC) deal-making conference in Las Vegas, and its 50,000-plus attendees as an indicator of the continuing strength of that market.

“You see those numbers and something good has got to be happening for over 50,000 people to come to Vegas,” he says.

Mixed-use also gets the thumbs up from Mayer. With its various combinations of residential, hotel, office, and retail space, mixed-use developments provide the amenities people want within close proximity, while offering environmentally sound benefits such as nearby transportation which helps reduce greenhouse gases and, in more forward-thinking developments, green roofs and wastewater management.

Green and sustainable practices will start to play a bigger factor in new development and, in some cases, real estate sales in the coming year. The cost for implementing these designs is starting to decrease as more products and more companies come into the market, and the long-term payback in energy savings and productivity is worth the initial investment.

Cities like Chicago require governmental buildings to be green and they offer incentives like faster permit cycling to incorporate green roofs and water management into new development throughout the city.

Brownfields fit particularly well with green and sustainable concepts, having long been a green practice itself, just by the inherent nature of brownfield remediation and redevelopment—take an environmentally impaired property, clean it up and revitalize a business or an entire community’s economy.

So has the economy, with its tie to the subprime fallout, really hurt the outlook for real estate in other sectors? The volatility of the housing market has created a good opportunity for buyers to invest in properties that might otherwise not have been in their league before. Couple that with the relative stability and availability of brownfields and deals will get done this year, though with some degree of caution on the part of all players.

Pricing on brownfields does not seem to have been impacted, though lenders are taking much longer to do their underwriting, notes Edwards. Many of them have greatly tightened their underwriting criteria, particularly when there are environmental issues associated with a site.

“I think that desirable properties will continue to move forward through state VCPs, perhaps a little more slowly than they would have a couple of years ago,” she says. “I think the more upside down properties will have a harder time until there’s more stability again in the economic markets.

“If the economic stimulation package goes through Congress quickly, that will calm any nervousness that may be out there in the financial markets and further steady the brownfields market.”