Led by real estate ads, spending on local online advertising is expected to grow by 31.6 percent next year to $7.7 billion, according to a Borrell Associates report released Thursday.

Real estate companies are the biggest buyers of local online advertising, accounting for 21.8 percent of all spending, the report said. With a 12.7 percent share, auto marketing was the second-biggest source of local online ad revenue. Credit and mortgage companies were third on the list of big spenders, acounting for another 5.3 percent of local online ad revenues.

Borrell expects the growth in real estate local online ad spending to accelerate, because only 39 percent of agents are currently advertising there. But the report projects that overall, growth in local online advertising will slow before peaking at $9.5 billion in 2009.

“Local online advertising has enjoyed double-digit growth since it first became trackable in 1998, but that pace cannot continue forever,” the report concludes. “In fact, we expect the growth to slow as this category approaches $10 billion and becomes a more mature medium toward the end of the decade. By then, we anticipate that its growth will moderate to a pace that more closely reflects the single-digit growth prevailing for all advertising media taken together.”

The slowdown is anticipated in part because companies spend more of their marketing budgets on online promotions, rather than ads. Promotions include sponsorships, search-engine optimization, viral marketing and blogs. By 2010, expenditures on online promotions are projected to reach $10 billion, rivaling or exceeding local online ads, the report said.

Newspapers, which offer ads with text and static pictures to local online advertisers, have captured the biggest share of local online advertising dollars, the report said. Local online ad sales will make up between 5 percent and 10 percent or more of total ad revenue at major U.S. newspaper companies including Belo, McClatchy, Gannett, Tribune Co., Scripps and the New York Times and Washington Post.

Although banner ads and text listings such as classifieds are expected to remain dominant with a 73 percent market share of local online ads in 2007, paid search and e-mail are the fastest-growing categories.

Borrell projects paid search will grow to make up 44 percent of the local online market by 2010, compared with 24 percent next year. Real estate advertisers are the heaviest users of local paid search.

E-mail advertising — ads that run in mass e-mailings to consumers who have requested them from Web site operators — is expected to boost its market share from 3 percent to 7 percent during the same period.

“The e-mail opportunity for local site operators may be limited by their slow start in building lists,” the report noted. “We surveyed more than 6,500 local Web sites and found that fewer than 10 percent of them offered opt-in e-mail.”

TV stations and local “city.com” sites have been the most aggressive in building e-mail lists, the report found. About 17 percent of Web sites operated by TV stations offered news and weather alerts through opt-in e-mail.

TV stations also lead the pack in sales of online video ads, which Borrell plans to begin tracking next year.

“While the amount spent by local advertisers on streaming video commercials is too small to measure accurately today, we believe that it is already between $75 million and $100 million,” the report said.

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