I've started making the rounds - presenting the 2008 Emerging Trends report for the Urban Land Institute and PricewaterhouseCoopers. Audiences seem pretty accepting that the industry is due for a correction, keeping fingers crossed for a shallow downturn and fairly confident that a housing-style meltdown isn't in the offing. People pin their hopes on relatively good supply/demand fundamentals and the shaky economy holding up. They can handle predicted cap rate increases of 25 to 50 basis points unless they overpaid and overleveraged as some recent vintage (2005-2007) buyers did.

While fundamentals are okay they are not great, especially away from the prime global pathway markets along the East and West Coasts. Office vacancies oscillate in the low to mid teens in many markets and absorption slows down. Financial company distress may lead to more layoffs. Tenants get the sense the tide is turning more in their favor if they hold back from making leasing deals. Some postpone expansion plans. Hotels have peaked. Retail braces for consumer pullback - will falling home values and rising oil prices finally close pocket books? Only apartments seem poised to take immediate advantage of housing woes.

The economy, meanwhile, operates from weakness - a flagging dollar spurs exports and lower interest rates buffer stressed capital markets. Lower rates may help the economy muddle through and the technology sector rebounds, but lenders won't be offering "anything goes" credit terms any time soon. That's bad news for the transaction markets - volumes will be down (maybe way down) next year. As for returns, expect reversion to the mean. If a no recession/tepid economy scenario ensues, core-unlevered investors could register mid-to-high, single-digit performance. Recession could mean mid-to-low single digit returns, or worse. But after a decade of outsized returns in a cyclical business, no one should be surprised at some reversals. Long-term players have raked in strong gains. It´s investors and lenders, who pushed the envelope over the past 18 months that look most vulnerable. Getting out from negative leverage will not be easy for them. Many observers in 2006 and 2007 Emerging Trends reports had said overly optimistic transaction pro formas didn't make sense. They were right.