Real Estate Research Corporation, Principal Real Estate Investors and Torto Wheaton Research teamed together to compile a "2005 Economic Forecast," which provides details for three possible scenarios for U.S. economic growth, the probability of these scenarios occurring, and their likely impact on REITs.

The most likely economic scenario for 2005, according to the research, is the "Slow and Steady" scenario where moderation is key. This is a best-case scenario for REITs in that it calls for moderate recovery in spending, moderate inflation and moderate consumer activity.

The other two scenarios are viewed to be relatively unlikely. The "Double-Dip" scenario is where job growth may falter, causing businesses to recoil, consumption to give way and bankruptcies to rise. The "Rate Spike" scenario features swift job growth, soaring inflation and a spike in interest rates, resulting in an inflation-related business cycle.

Economic Forecast for 2005: As the Economy Goes, So Goes Real Estate
	Double-Dip	Slow and Steady	Rate Spike
Description	If job growth falters watch for businesses to recoil, consumption to give way, and bankruptcies to rise. At least there is no inflation.	This baseline outlook is a best-case scenario. It calls for moderate recovery in spending, moderate inflation, and moderate consumer activity. Everything in moderation.	Too much of a good thing. Job growth comes back with a vengeance. Inflation soars. Interest rates spike. And back we fall into a classic inflation-related business cycle. It's fun while it lasts, anyway.
GDP Growth	0–2%	3–4%	4.5%+
Probability	15% probability	75% probability	15% probability
Job Growth	Risk aversion rules. It’s back to conditions similar to the last few years prior to the return of hiring. Productivity surges and outpaces GDP growth on a consistent basis.	Business investment and hiring resumes. High-tech jobs reappear. Consumers moderate their borrowing ways, causing layoffs in the housing market and among certain retailers.	This is a classic recovery in every way. Hiring is up sharply, as is consumption and investment. Job growth is very swift, and productivity can’t keep up with GDP growth—until we overheat.
Consumer Spending	Consumer spending goes the way of the job market. Consumers already have too much debt, and the weight of job losses is too much to take.	Consumption falls below income growth for several quarters. The housing market slows. However, this pace of spending allows household balance sheets to mend, clearing away a looming imbalance in the economy.	Strong hiring, brings strong spending, well above income trends and despite higher interest rates. The party ends soon enough, however, as job growth eventually caves.
Business Expansion	Higher risk aversion and declines in pricing power lead to little or no expansion in the near term. We return to the jobless recovery.	Slow and steady wins the race. Moderate hiring and moderate expansion lead to a long and sustainable recovery.	It is a classic boom and bust. We have a very quick burst of expansion—too quick—which brings misinvestment and higher inventories, and leads to overcapacity and liquidation.
Inflation	Not much inflation.	Moderately higher inflation. Nothing to worry about, but consumers may not like it.	Sharply higher inflation, leading directly to another business cycle.
Interest Rates	No Fed hikes to speak of—maybe even a few rate cuts.	The Fed does what it says it will do. Moderate tightening over the long run.	The Fed can’t tighten fast enough to prevent the beginning of yet another cycle.
Office	Worst-case scenario for office properties. No jobs equals no absorption, plus increased tenant credit problems.	Office absorption comes back around and rent growth proceeds.	Office takes off like a rocket, but it is not sustainable.
Industrial	Similar to office—no expansion and no demand for industrial space. Vacancies rise and rents fall.	Absorption slowly improves, but it takes awhile for rents to gain traction.	Same as office—short-term surge in business investment and consumption helps demand temporarily, but the renewed cycle hurts industrial in the long run.
Apartments	Multi-housing suffers because renters are suffering. Lack of wages limits growth of renter households.	Best-case scenario for apartment market. Higher interest rates and more jobs.	Shorter recovery than in baseline, although surging economy leads to continuing oversupply.
Retail	Retailers finally find out what it is like to suffer higher vacancy and lower rent. Another wave of tenant credit problems and store closings.	Retail does fine, but lagging retailers suffer with consumer frugality.	Retailers enjoy renewed pricing power for a time, but it ends badly.
Hotel	Hotel business buckles under tight budgets.	Travel is back in every way. Hotels do well.	Icarus-like performance for hotels.