Charles Lowery believes the economy is recovering slower than originally anticipated and now expects the recovery to occur in the second half. He sees unemployment remaining flat: "There has been an increase in hiring, but there has also been a plethora of bad news coming out about layoffs, so they have evened out. There won't be any inflation to worry about because the economy isn't strong enough."
The dollar could strengthen against the euro for a while, depending on world events. If there is a war, that could lead to a flight to quality, Mr. Lowery predicted. But he doubts the yen will strengthen, because the Japanese still have a lot of problems in real estate and in the financial industry.
"The potential for war and other acts of terrorism have become part of our national psyche," he observed. "I don't know how much we can factor into our plans, except to make prudent investments and to become more risk averse. If something should happen, we want to be protected."
Meanwhile Prudential has been a net seller for the first time, because it hasn't found any acquisition opportunities that were appropriate. "This is largely due to the fact that there is a lot of capital available that can use a lot more leverage than Prudential can. It allows private buyers to leverage more acquisitions, and we can't compete there.
"We continue to find multifamily challenging for acquiring existing assets," Mr. Lowery said. "There is huge competition for it, and softness in the market. So we have been supporting manufacturing of it on the development side, and have been net sellers into that market."
One sector he favors is retail, particularly power centers anchored by stable retailers such as Staples or Toys `R' Us, and grocery-anchored strip malls. "These tend to have long leases with high coupons, and have been doing all right. But investors need to watch for competition from the likes of Wal-Mart and Target, and also be careful about the locations," he advised.
Investors also need to be cautious about the office sector, Mr. Lowery said. "Those (office properties) with long-term leases and good creditworthy tenants are desirable, while others with significant tenant rollover are unsalable. People are worried about when demand is coming back. It's a huge issue in terms of when jobs will come back and when the recovery will occur."
He also likes the industrial sector, noting it percolates along. Supply will follow demand, he said.
In terms of regions, Prudential thinks Southern California could outperform other areas, because it's been a center for people and job migration. The Pacific Northwest also offers potential. And Mr. Lowery likes the Northeast because of its land constraints, and Washington, particularly for office space because of the stability of government.
If Mr. Lowery could buy any property in the world next year, first choice would be apartments in infill (redeveloped urban or suburban) locations in southern California and the Northeast corridor.
Chief executive officer
Prudential Real Estate Investors, Parsippany, N.J.
Assets under management: $15.5 billion
GDP: 2% to 3%
Hot sectors: Retail power centers, industrial properties
Hot regions: Southern California, Northeast corridor from Boston to Newark, Washington