Studley Market Stats

Global Market Statistics Covering the World of Real Estate and Property VOL. 2 ISSUE 1

www.globalpropertyalliance.com

Winter / Spring 2003

MARKET FOCUS:

EUROPEAN TAX CHANGES BRING MIXED NEWS

Designs by Studio Libeskind and THINK are the two finalists in the World Trade Center site design competition.

Alterations to the taxation of commercial property in some European countries have brought swift market reactions.

In December 2002, the French parliament approved a change in tax law to give French property companies a taxtransparent structure that is similar to the Belgian, Dutch and German systems. Listed property companies no longer have to pay corporate taxes and can now distribute 85% of their income and 50% of their capital gains in dividends.

These companies also pay a one-off exit tax on unrealized capital gains of 16.5% over a four-year period. This new structure, known as SIICs, and the resulting changes are likely to stimulate the market as a new wave of indirect investment through SIICs occurs.

Courtesy of Lower Manhattan Development Corp.

In Greece, operational sale-leaseback transactions involving owner-operators of properties and leasing companies are no longer subject to transfer tax, prompting a number of corporations to enter into this type of arrangement.

MARKET FOCUS:

SUBLEASE EXPIRATION WAVE APPROACHES IN THE U.S.

Recent tax changes announced in Ireland’s budget for 2003 sent a shock wave through the country’s commercial (continued on page 12)

Most major markets in the United States have experienced a significant increase in available space during the past two years, largely in the form of sublease space offered by businesses that overestimated their growth.

662

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$ per sq. ft.

1,104

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(continued on page 2)

110

per sq. mtr.

As the economy slid into recession and subsequent economic softness, vast numbers of businesses across the United States downsized, consolidated or failed. In many cities, millions of square feet of office space have been returned to the market as sublease space. In fact, some cities have seen the amount of available sublease space double, triple and even quadruple.

INTERNATIONAL PRIME OFFICE ASKING RENTAL COMPARISON

MAJOR MARKET COMPARISON Office Rent2 City

Yield1

$/ sq. ft.

Retail Rent2

= C/ sq. mtr.

$/ sq. ft.

= C/ sq. mtr.

Industrial Rent3 $/ sq. ft.

= C/ sq. mtr.

6.5%

$31.38

= C 315

$159.41

= C 1,600

$9.96

= C 100

Athens

7.8%

$31.88

= C 320

$368.63

= C 3,700

$8.47

= C 85

Atlanta

10.1%

$22.03

= C 221

$18.28

= C 183

$8.38

= C 84

8.0%

$12.95

= C 130

$51.81

= C 520

$3.99

= C 40

6.5%

$29.89

= C 300

$59.78

= C 600

$7.97

= C 80

Beijing

12.0%

$27.90

= C 280

$109.59

= C 1,100

$11.96

= C 120

Berlin

5.0%

$29.29

= C 294

$239.11

= C 2,400

$5.48

= C 55

$129.52

= C 1,300

$6.48

= C 65

Amsterdam

Bangkok Barcelona

Brussels

6.5%

$24.91

= C 250

Buenos Aires

7.0%

$8.97

= C 90

$13.95

= C 140

$2.39

= C 24

9.7%

$29.78

= C 299

$145.00

= C 1,455

$7.50

= C 75

Dallas

10.4%

$19.36

= C 194

$19.60

= C 197

$7.70

= C 77

Denver

9.5%

$21.99

= C 221

$37.00

= C 371

$7.07

= C 71

Chicago

Dublin

6.0%

$47.62

= C 478

$538.00

= C 5,400

$10.96

= C 110

Hamburg

5.0%

$26.30

= C 264

$199.26

= C 2,000

$8.37

= C 84

Hong Kong

7.5%

$52.60

= C 528

$452.12

= C 4,538

$6.38

= C 64

10.2%

$23.57

= C 237

$27.65

= C 278

$6.18

= C 62

Kuala Lumpur

7.0%

$10.86

= C 109

$63.76

= C 640

$4.78

= C 48

Lisbon

7.5%

$25.11

= C 252

$94.65

= C 950

$10.16

= C 102

London

6.0% $106.20 = C 1,066

$807.00

= C 8,100

$21.92

= C 220

Los Angeles

9.0%

$22.23

= C 223

$230.00

= C 2,309

$12.10

= C 121

$89.67

= C 900

$8.97

= C 90

Houston

Madrid

6.5%

$32.38

= C 325

Manchester

7.0%

$40.85

= C 410

$448.33

= C 4,500

$8.97

= C 90

Mexico City

12.0%

$27.90

= C 280

$39.85

= C 400

$5.98

= C 60

$32.23

= C 323

$7.63

= C 77

Miami

9.9%

$29.95

= C 301

New York

9.4%

$54.33

= C 545

$296.00

= C 2,971

$12.22

= C 123

6.0%

$68.74

= C 690

$797.03

= C 8,000

$5.48

= C 55

10.3%

$24.44

= C 245

$70.00

= C 703

$9.91

= C 99

Prague

9.0%

$22.12

= C 222

$155.42

= C 1,560

$5.98

= C 60

San Francisco

9.6%

$28.72

= C 288

$185.00

= C 1,857

$13.56

= C 136

Santiago

5.0%

$17.14

= C 172

$15.24

= C 153

$4.78

= C 48

Seoul

8.0%

$29.89

= C 300

$75.32

= C 756

$2.99

= C 30

$5.48

= C 55

$15.14

= C 152

Paris Philadelphia

Shanghai

9.0%

$24.91

= C 250

$159.41

= C 1,600

Singapore

4.0%

$37.86

= C 380

$308.85

= C 3,100

Taipei

6.0%

$25.90

= C 260

$89.67

= C 900

$7.97

= C 80

Tokyo

4.0%

$45.13

= C 453

$57.29

= C 575

$13.75

= C 138

Warsaw

9.5%

$33.87

= C 340

$35.87

= C 360

$6.58

= C 66

$42.53

= C 427

$61.40

= C 616

$13.30

= C 133

Washington, D.C.

9.1%

Notes: The yield used is the office yield.

Rents quoted are maximum prime rents.

3 For Industrial Rents in the U.S., rents shown are for flex space.

4 Figures quoted in graphs and narrative are dollars per square foot per year and euros per square meter per year.

1 2

2

MARKET FOCUS: UNITED STATES SUBLEASE EXPIRATION WAVE APPROACHES (continued from front cover) Chicago, which recorded 6.2 million square feet of sublease space on the market at year-end 2000, posted a high of 14.2 million square feet of available sublease space in the first quarter of 2002 before gradually receding during the rest of the year. New York City saw its sublease space totals balloon from 3.2 million square feet in the fourth quarter of 2000 to slightly more than 20 million square feet at year-end 2002. Denver sublease space totals rose from 1.6 million square feet at year-end 2000 to a high of 6.3 million square feet in the third quarter of 2002.

The rate at which sublease space has been entering the market has slowed during the past year. Chicago actually saw sublease space levels recede. New York City has seen the quantity of available sublease space increase, but at a lower rate. New York picked up just 2 million square feet in all of 2002 compared to the addition of 11 million square feet of subleases in 2001. And in Denver, sublease space levels started to decrease in the fourth quarter, falling nearly 400,000 square feet from the third quarter.

The influx of sublease space has not ended, however, and some markets expect further increases from struggling industry sectors. Further complicating the situation for owners is “shadow space,” sublease space that is not on the market but which could be made available under the right terms. Yet another factor that will have a real impact on the market is the quantity of sublease space that expires during the next several years coming back onto the books of property owners.

So far, building owners have continued to receive rent on previously leased space, either from the primary tenant or from a sublessee. However, during the next three years, an enormous quantity of leases underlying sublease space will begin to expire, converting to direct space. When this occurs, property owners – particularly those in Atlanta, Denver, New Jersey and Dallas – will stop receiving rent and find themselves with significant inventory in a soft market.

By year-end 2005, the primary leases on 51.9% of Atlanta’s available sublease space will expire, representing 3.2% of the city’s entire office inventory. In Denver, the primary leases on 51.5% of its available sublease space will expire, equal to 3.2% of the market’s inventory. New Jersey and Dallas face a similar fate by year-end 2005. In New Jersey, the primary leases on 38.7% of the state’s available sublease space will expire, equaling 2.9% of its office inventory. In Dallas, the primary leases on 50.3% of the area’s available sublease space will expire, representing 2.8% of the city’s office inventory.

While New York and Washington, D.C. will also see a wave of expirations, those two markets will be least affected as a percentage of total inventory. In New York, the primary leases on 17.4% of the city’s available sublease space will expire by the fourth quarter of 2005, equaling 0.8% of Manhattan’s total inventory. Washington will see the primary leases on 28.5% of its available sublease space expire, representing 0.8% of the District’s total inventory.

The approaching wave of available space and the so-called “jobless” recovery that many economists now expect may

signal limited new absorption in the next 12 to 18 months.

This, combined with low interest rates, is prompting owners to shore up their portfolios now, embracing renewals and increasing occupancy to refinance at favorable rates.

Although this may be one of those rare times when renewal leases appear to be beneficial to both sides of the ledger, enabling tenants and owners to pursue their interests at the same time, some tenants remain unwilling to make a decision until they have a better idea of their prospects for the future.

Markets across the United States stand at different stages of the recovery process. Some regions have yet to hit bottom, others believe that they have seen the worst of the downturn and a few areas appear to be improving.

Given the uneven state of the recovery it is likely that it will take several quarters at least before activity increases in the commercial real estate markets across the U.S. Building owners and tenants are taking this into consideration as they position themselves for an uncertain 2003, a year that may hold opportunities if geo-political unrest quiets and the economy gets back on track.

WAVE OF SUBLEASE SPACE EXPIRATIONS TO HIT U.S. MARKETS Although the influx of sublease space has slowed to a trickle or stopped throughout the U.S., a vast quantity of space remains available. The primary leases on millions of square feet of available sublease space are set to expire by 2005. Once these primary leases expire, the sublease availabilities will convert to direct space and building owners will no longer receive rent.

Available Sublease Space Expiration Analysis Market Atlanta Chicago Downtown Chicago Suburban Chicago Total Dallas Denver South Florida Houston Los Angeles New Jersey New York Orange County Philadelphia CBD Philadelphia Suburban Philadelphia Total San Francisco Northern VA Washington, D.C.

(1)

sf Expir.

By 12/03

% Expir.

By 12/03

sf Expir.

By 12/04

% Expir.

By 12/04

sf Expir.

By 12/05

% Expir.

By 12/05

Total Sublease sf

Total Inventory

% of Total Inventory Expir. By 12/05(1)

1,427,419 311,576 1,414,268 1,725,844 1,924,216 1,123,839 453,005 1,065,999 959,693 1,926,673 1,150,537 486,076 161,978 373,217 535,195 315,969 1,289,767 228,314

17.4% 5.4% 20.3% 13.6% 18.8% 18.2% 16.2% 21.4% 11.6% 16.5% 5.9% 13.5% 13.2% 14.7% 14.2% 5.7% 13.6% 8.4%

2,380,272 860,663 1,863,265 2,723,928 3,331,535 1,954,941 817,196 1,952,111 2,382,002 3,017,845 1,983,067 1,090,889 330,293 598,617 928,910 939,197 2,257,025 477,635

29.1% 15.0% 26.8% 21.5% 32.5% 31.7% 29.2% 39.1% 28.8% 25.8% 10.2% 30.2% 26.9% 23.6% 24.7% 17.0% 23.8% 17.5%

4,247,768 1,586,984 2,692,842 4,279,826 5,160,069 3,177,615 1,485,479 3,068,213 3,618,630 4,523,878 3,384,454 1,646,248 539,474 959,199 1,498,673 1,650,172 3,429,005 778,252

51.9% 27.7% 38.7% 33.7% 50.3% 51.5% 53.1% 61.5% 43.8% 38.7% 17.4% 45.6% 44.0% 37.8% 39.8% 29.9% 36.2% 28.5%

8,184,134 5,729,589 6,962,329 12,691,918 10,258,964 6,174,440 2,799,937 4,989,335 8,260,368 11,676,758 19,448,350 3,606,560 1,226,048 2,535,942 3,761,990 5,510,612 9,464,017 2,729,260

131,047,156 121,387,431 103,669,255 225,056,686 184,634,086 99,704,034 96,212,902 171,800,627 205,507,715 155,348,160 403,573,759 86,561,255 38,315,186 56,813,424 95,128,610 77,383,106 144,245,525 100,333,191

3.2% 1.3% 2.6% 1.9% 2.8% 3.2% 1.5% 1.8% 1.8% 2.9% 0.8% 1.9% 1.4% 1.7% 1.6% 2.1% 2.4% 0.8%

Represents the availability rate of sublease space expiring by December 2005 as a percentage of the overall building inventory.

3

UNITED STATES

Houston: Ongoing negative economic news and corporate restructuring and downsizing have driven the Houston market to new lows. The overall availability rate rose 1.1 percentage points to just under 20% in the fourth quarter, with the Class A availability rate increasing to 18.9%. Average asking rental rates in Houston continued their downward trend. Class A average asking rents fell

U.S. PRIME OFFICE ASKING RENTAL COMPARISON

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about the progression of Hyatt Center, a new office tower in Chicago’s West Loop, and the completion of several large leasing transactions. Another new trend in Chicago was the presence and growth of underlying available space – at least 3.4 million square feet has been identified downtown – that has not been formally marketed or posted on listing services. The Class A availability rate jumped 8.3% from the third quarter, ending the fourth quarter at 17.0%.

Rents continued to gradually slip, with a 2.9% dip for Class A rents in the fourth quarter, ending the year at $29.78 per square foot.

$ per sq. ft.

Chicago: The fourth quarter of 2002 was full of news

nt

continued to retrench. Market indicators in Atlanta have reached levels not seen since the early 1990s. The region’s overall availability rate topped 24% in the fourth quarter of 2002, with Class A availability rates at just under 26%.

Landlords have increased concession packages and become more flexible on a variety of lease negotiation issues. With landlords competing to outdo each other to lure new tenants and hang on to existing ones, space users have increasingly found themselves with a large variety of attractive alternatives.

ic

Atlanta: The city weakened further as local corporations

Denver: The status of the metro Denver office market remained relatively unchanged in the fourth quarter of 2002. Aggressive landlords have offered effective rents $2 to $4 per square foot below asking rates and a host of concessions not seen since the early 1990s. Demand remained tepid, however, resulting in elevated availability rates and declining rents. Although the sublease glut peaked earlier in the year, 6 million square feet of sublease space remained available. The continued health of Denver’s central business district may be affected by two variables: Gates Rubber Co.’s potential lease of the entire 285,000square-foot Legacy Plaza building and the financial condition of Qwest Communications.

tla

Class A asking rents fell considerably in 2002, with New York City experiencing the greatest decline. Midtown Class A rents dropped from $71.46 in the first quarter to $60.96 at the end of the year. In the same time period, Class A rents in Lower Manhattan dropped from $52.02 to $44.95, San Francisco Class A rents fell from $31.89 to $28.72, Los Angeles Class A rents decreased from $24.50 to $22.23 and Northern Virginia Class A rents slipped from $27.38 to $25.76.

characterized by mounting levels of available space in the Dallas/Fort Worth region. A handful of developers have aggressively marketed proposed office buildings for the Uptown submarket that totals 1.5 million square feet. The Dallas CBD, which had seen growing tenant interest, posted a combined Class A and B availability rate of 24.6%, one of the highest among major U.S. cities. Rental rates for Class A space in Dallas dropped $0.37 to $19.36 per square foot.

Average availability rates rose to 27.8% overall, with Class A product posting an availability rate of 26% and Class B space at 29.4%.

Ch

In the space of two short years, most major U.S. markets have gone from near-record tightness to near-record softness. In fact, in eight of the 13 markets tracked by Julien J. Studley Inc., Class A availability rates were greater than 20% at year-end 2002. In five of those 13 markets – Atlanta, Suburban Chicago, Dallas, Denver and Orange County – Class A availability rates surpassed 23%.

Dallas: The fourth quarter of 2002 wrapped up a year

A

Corporate leaders have suffered from indecision during the past 18 months. Recession, terrorism, corporate fraud and the prospect of war have caused many to question major capital investments and expansion plans. However, while it may have seemed that new economic problems loomed around every corner in 2002, it appears that we may have reached bottom and could see some improvement in 2003.

South Florida appears to have reached a state of equilibrium. Availability rates fell an average of one-half a percentage point overall for the region at year-end 2002.

Landlords have been slow to adjust to indications of a strengthening market, and tenants have taken advantage of this by structuring innovative transactions. Overall average asking rents decreased in Miami-Dade County by $0.52 per square foot to $24.09, while falling only slightly in Broward County to $21.41 and remaining basically unchanged in Palm Beach County at just under $23.00.

New York: The increasing quantity of “shadow space” in New York City has added yet another layer of consideration for tenants in the market. The presence of shadow space expands options for tenants and further enhances their leverage with building owners. New York City saw Class A availability rates increase by more than 55% in 2002, from 7.2% in the first quarter to 11.2% in the fourth quarter. Meanwhile, overall availability rates rose from 9.2% in the first quarter to 11.0% in the fourth quarter, a rise of nearly 20%. Accordingly, asking rents have decreased in every quarter. Class A rents in New York City have dropped more than 6% in 2002, slipping from $61.40 per square foot in the first quarter to $54.33 in the fourth quarter.

Philadelphia: The region’s office market remained static in the fourth quarter of 2002 compared to earlier in the year, with an overall availability rate of 18.2%.

The strong leasing performance posted by some Philadelphia

risen for three consecutive quarters, as tenants cash in on low rents and generous concessions. Class A asking rents dropped to $28.72 in the fourth quarter of 2002, representing the eighth consecutive quarterly decline. It is expected that Class A rents will remain in the $20s for all of 2003. Availability rates maintained a level in 2002 not seen in more than three decades. After two years of freefall, the San Francisco market stabilized at about 80% occupancy in the second half of 2002. Although availability rates may have found a temporary ceiling between 19% and 20%, the supply/demand imbalance is likely to remain for the next several years.

Washington, D.C.: While the D.C. market posted a slight increase in available space at the close of 2002, the city still boasted the nation’s lowest availability rate at 7%. Major leasing activity in the fourth quarter continued to be dominated by government users and law firms. Slow activity, minimal private-sector tenant growth and belowmarket sublease offerings may force landlords to be more flexible with rental rates. Five buildings scheduled to be delivered in late-2003 will add more than 1.5 million square feet to the market. The downtown sales market enjoyed a high level of activity in 2002 as investors sought well-leased buildings with creditworthy tenants.

U.S. PRIME OFFICE YIELD COMPARISON 12 10 8 6 4 2 0 nt a Ch ic ag o D al la s D en ve r H ou st Lo o s n A ng el es M ia m N ew i Yo Ph rk ila de Sa lp hi n a Fr W an as c hi is co ng to n, D .C .

Miami: After enduring declining market conditions,

San Francisco: San Francisco leasing activity has

% Yield

renewing their leases and negotiating flexible long-term deals. Steady activity pushed down the Class A availability rate to 20% in the fourth quarter. The large number of space users electing to renew and expand at their current locations kept net absorption at less than 10%. With large amounts of available space remaining throughout the Los Angeles region, rental rates fell in all building classes in the fourth quarter of 2002. Overall rents have fallen more than 6.4% in the past year, dropping from $25.96 per square foot in the first quarter to $24.29 in the fourth quarter. Class A rents have slipped about 7.3% in the same time period, decreasing to $22.23.

tla

Los Angeles: Los Angeles tenants have been busy

area submarkets may be a harbinger for 2003. More transactions were being closed and less sublease space was coming to market in the final quarter of 2002. Although the Philadelphia region suffered rising vacancies and minimal leasing activity in 2002, investors poured money into local properties. The CBD recorded building sales in excess of $800 million, surpassing the previous high for investment sales set in 1998.

A

$1.12 per square foot to $23.57, while non-Class A asking rents fell slightly to $18.09. Sublease space comprised 5.3 million square feet, adding 3.3 percentage points to the availability rate and bringing the combined availability rate to 19.6%.

5

EUROPE

Amsterdam: The performance of the real estate market in Amsterdam has not changed significantly since the first half of 2002. The Dutch economy continued to struggle through a slowdown, with the effects particularly evident in Amsterdam. The stagnant information technology sector showed little sign of improvement, which has contributed to an increase in the office availability rate to 10%. Prime market office rents decreased slightly to = C 315 per square meter. There were no major changes in the retail and industrial markets, with retail and industrial rents remaining stable at = C 1,600 per square meter and = C 100 per square meter, respectively. Investment in Amsterdam real estate remained positive. German investors such as Commerz Grundbesitz Investmentgesellschaft GmbH (CGI) were active.

CGI bought part of the Mahler 4 development for = C 295 million. Very little new construction is expected this year for the city.

Athens: Despite an improving Greek economy, the

6

with the reduction in global economic activity, contributed to a continued shift in the office sector in favor of tenants and buyers. Torre Agbar in Laytena, a fully pre-leased office complex, is expected to become a new architectural landmark in Barcelona. Office rents and yields remained stable at = C 300 per square meter and 6.5%, respectively.

Demand for industrial parks located close to Barcelona was stable, and no new large industrial developments are expected anytime soon. Retail sector activity is expected from the consolidation of existing retail centers and the development of new shopping centers, as the city’s central streets can no longer provide new retail space. The level of investment in Barcelona increased in the second half of 2002, with buyers acquiring office and industrial properties to diversify their traditional retail and residential portfolios.

Berlin: More German companies and institutions have moved to Berlin to be near the central government, with much of their attention focused on the development of the East City. Investors were very active in this area, where property prices are considerably lower than in prime locations and public transportation is excellent. Locations in the West City remained resilient, although prime office rents

EUROPEAN PRIME OFFICE ASKING RENTAL COMPARISON 110

1,104

88

883

66

662

44

442

22

221

0

0

per sq. mtr.

commercial real estate market slowed and demand weakened at the beginning of 2003. The office sector witnessed a significant decrease in demand, with office rents decreasing slightly to = C 320 per square meter. International requirements were rare and domestic tenants were increasingly cost sensitive. While landlords have not yet shown flexibility in terms of lower asking rents or increased incentives, these measures may become necessary to attract

Barcelona: The city’s new stock of office supply, coupled

$ per sq. ft.

The confirmation of European Union accession for another 10 members (subject to ratification) will focus investors on opportunities in those countries, particularly in Poland, Hungary and the Czech Republic. Infrastructure improvements are expected to create new retail opportunities. The capital markets are finally beginning to reflect tenant sentiment, with investors taking a more cautious approach. This was especially evident in countries such as France and Belgium, where short lease terms expose reduced demand. Even so, the appeal of bricks and mortar, and the continued lackluster performance of equities, will help make real estate an attractive alternative for many investors.

new tenants. There was no major change in the performance of the retail sector and retail rents in prime locations remained stable at = C 3,700 per square meter.

Rental levels have also remained steady in the industrial sector, although there remains a lack of available welllocated modern warehouse space. The main Greek banks were the most active investors in the market in the second half of 2002, and legal changes facilitated the establishment of real estate open-ended funds with major tax advantages.

A m st er da A m th Ba en rc s el on a Be r Br lin us se l D s u H bli am n bu rg Li sb o Lo n nd o M n M ad an rid ch es te r Pa ri Pr s ag W ue ar sa w

A majority of the European markets experienced a significant downturn in office property demand in 2002.

Supply increased as many corporations sought to offload surplus space, often competing head-to-head with brandnew space. Although tenant demand was down overall, deals were still being made. Banks, law firms and engineering groups all signed leases for big spaces in London, Paris and Madrid during the last quarter of 2002.

(continued on page 8)

EUROPEAN PRIME OFFICE YIELD COMPARISON 10

8

6

4

2

0 m t Ba hen s rc el on a Be Br rlin us se l D s u H blin am bu rg Li sb o Lo n nd o M n M ad an r ch id es te r Pa r Pr is ag ue W ar sa w

markets compared to the performance of commercial real estate in other cities. However, Hamburg tenants still leased approximately 12% less office space in 2002 than they did in 2001, with the decline in the IT sector and portfolio adjustments carried out by insurance companies

second half of 2002 in central London despite a continued

er da

Hamburg: Hamburg was one of Germany’s more stable

London: The retail property market held up well in the

A

amount of the excess office space that has swamped the city over the past few years until at least the second half of 2003. The city center market, however, was not as badly hit as the suburbs, and yields for well-leased properties remained at 6%. The retail sector continued to perform well and is likely to be the best performing sector in 2003 supported by continued strong consumer and tenant demand. Retail rents increased in the second half of 2002 to = C 5,400 per square meter. An oversupply also existed in the industrial sector, with weak tenant activity driving rents down. While low interest rates have fueled investment activity, an increase in the stamp duty to 9% reduced property values by 3%. This may inhibit future investment particularly from smaller investors. Many Irish investors continued to turn their attention to the United Kingdom and continental Europe.

and industrial sectors in the second half of 2002, with minor adjustments bringing the average prime office rental rate to = C 252 per square meter, to = C 950 per square meter for prime retail and to = C 102 per square meter for industrial.

The retail sector proved attractive to major investors such as Akeler Holdings S.A. and Portuguese Property Funds, with particular interest in shopping center projects. However, new office developments were only of interest to investors if they were pre-leased. In the main CBD submarkets of Avenida de Liberdade and Avenida da Republica and parallel streets, there is approximately 34,000 square meters of new office space under construction. This new supply is expected to put downward pressure on rental rates, with rent decreases projected for the first half of 2003.

% Yield

Dublin: Dublin is not expected to absorb a significant

Lisbon: Rental rates stabilized in Lisbon’s office, retail

st

commercial property market into 2003. Central business district office buildings performed well due to continued demand from the EU for office space. As a result, prime office rents increased slightly to = C 250 per square meter.

The office sector remained the most attractive to investors, particularly German investment funds such as Deutsche Immobilien Fonds AG, or DIFA, which acquired a 19,000square-meter property called Le Mondrian. The office availability rate was 8.7% at the end of 2002, and the prime office yield remained at 6.5%. There was no notable change in the industrial or retail market, with rents remaining stable at = C 65 and = C 1,300 per square meter, respectively.

m

Brussels: There were no major changes in the Brussels

contributing to the drop. The average prime office rent remained at = C 264 per square meter and the office yield decreased slightly to 5%. The high liquidity of German open-ended funds contributed to a very active investment sector. Transaction volume totaled approximately = C 1.25 billion in 2002, representing an increase of 60% from 2001.

DIFA made two prominent retail acquisitions in Hamburg: The Herold Centre and Wandsbek Quarree. The number of new office developments increased toward the end of 2002, with projects such as Berliner Tor Centre and St. Georg partially leased at between = C 138 and = C 144 per square meter.

It is feared that the German economy’s continued poor performance will have a negative impact on the market in the first half of 2003.

A

fell to = C 294 per square meter. Newly emerging office locations such as the Postdamer Platz were well received by office tenants. The streets of Tauentzienstrasse and Kurfuerstendamm remained the prime retail locations in Berlin, although Postdamer Platz in nearby Friedrichstrasse has also established itself as a popular area. Retail rents remained stable at = C 2,400 per square meter. The industrial sector did not improve in the second half of 2002. Largescale manufacturers have moved to Brandenburg in the outskirts of Berlin, causing average prime industrial rents to decrease to = C 55 per square meter.

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EUROPE (continued from page 7) reduction in tourism. Prime retail rental units remained in demand, although many believe London’s retail market has peaked. Consumer spending is expected to fall by the second quarter of 2003. There is also evidence that supply has begun to overtake demand, especially in retail space on Oxford Street. Average retail rents have decreased slightly to = C 8,100 per square meter. Economic uncertainty and low tenant demand have applied further downward pressure to both the City and West End office markets, with rents falling to = C 1,066 per square meter in the West End and = C 902 per square meter in the City. With rents expected to decrease further, tenants with leases in Class A buildings have started to view their occupancy in those properties as a liability.

Tenants with the option to break their existing leases are taking advantage of the opportunity. The only significant new office developments expected in the West End are planned for the Victoria submarket and are aimed at the government sector. A number of pre-existing projects will be completed in 2003 and 2004 in the City, fueling fears of excess supply and a prolonged downward slide.

Madrid: The real estate market performed well in the second half of 2002, fueling expectations that the city will become a premier global business center in the coming years. The office market has recovered from a drop in demand experienced during the first half of 2002. There was an increase in the quality of available space, particularly in the new business districts on the outskirts of the city such as the business parks Campo de Las Naciones and Arroyo de la Vega. Investment activity also increased, with the largest transactions being the sale of leased office buildings and the development of new business parks. Madrid has seen a surge in new combined shopping and entertainment centers, and the retail sector remained stable overall with prime retail rents remaining at = C 900 per square meter.

Demand for industrial space remained strong and is being met by ample new construction on land zoned for industrial use throughout Madrid. The average industrial rent remained unchanged at = C 90 per square meter. As in Barcelona, residential investments have produced the highest profits for developers and speculative buyers since 1998. The local government has been supporting the development of commercial real estate in Madrid, which has greatly contributed to its improved performance.

Manchester: The Manchester office sector experienced rising demand and limited supply of office space in the CBD, which resulted in an increase in prime office rents to = C 410 8

per square meter. While rents are likely to increase further in the first quarter of 2003, the city’s limited supply of office space could eventually cause problems for the larger tenants in the professional and service industries that may need to fill space requirements before new buildings are delivered to the market. This may force some potential tenants to look at surplus space that exists on the fringes of the city and to property located south of the city. The industrial market was extremely competitive, with many tenants reluctant to commit themselves long term due to the unpredictable economic climate. Supply and demand, which was finely balanced in mid-2002, has shifted in favor of tenants, with supply likely to outstrip demand. Although the average industrial rental rate remained stable at = C 90 per square meter, it is predicted to increase during the first half of 2003.

Paris: Leasing activity within Paris CBD office buildings increased in the fourth quarter of 2002, however, tenants still took less space off the market in 2002 than they signed for the previous year. Space users have continued to relocate from prime office space in traditional CBD locations such as La Defense, helping to push down the average prime office rental rate to = C 690 per square meter. Despite this drop in rents, the Paris office sector still remained attractive to investors seeking more stable returns than those provided by the weak equity markets. The prime office yield decreased slightly to 6%. Cash-rich German funds, which were very active in the market in the first half of 2002, continued to invest in French commercial property. There was no major change in the retail or industrial markets, with continued reduced consumer activity resulting in a drop in demand from large retail users.

Prague: The historic floods that engulfed Prague in August 2002 have not affected the commercial property market as negatively as was first feared. Overall market sentiment has remained positive, although there has been a reduction in leasing, and some planned development projects close to the Vltava River have lost their tenants.

Several new office developments broke ground in Prague in the second half of the year. Phase 1 of Andel City, developed by investor United Business Machines, is due to be completed in early 2003. The project comprises four office buildings that contain a total of 11,500 square meters of office space. Another 160,000 square meters of office space is projected to come on line this year, although demand is expected to keep up with supply. Demand for retail space, however, has far outstripped supply, given the lack of prime retail space in Prague. With demand surpassing supply by (continued on page 12)

LATIN AMERICA

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office space in Mexico City continued in the second half of 2002, with numerous tenants relocating to take advantage of lower rents. The office sector, which has remained stable for the past year, has proved an attractive option for investors, and office yields have increased to 12%. The retail

LATIN AMERICA PRIME OFFICE ASKING RENTAL COMPARISON

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Mexico City: Demand for smaller, more cost-effective

the greatest signs of improvement in the second half of 2002. Investors remain confident that there will soon be a resurgence in consumer spending, which has remained at low levels for the past five years. This has driven the construction of a number of new shopping malls and centers. The popularity of shopping malls, however, has negatively impacted street-level retail businesses in Santiago. One exception to this has been the development of high-end retail units in exclusive residential areas such as Alonso de Cordova and Nueva Costanera streets. Office building construction has mainly been centered in the wealthy neighborhoods of the city, such as Vitacura and Las Condes. The office yield has decreased to 5%, although prime office rents have increased to $17.14 per square foot.

The industrial market was the worst performing property sector in Santiago. There were no new industrial developments in the second half of 2002 and rental rates fell to $4.78 per square foot as supply continued to exceed demand.

per sq. mtr.

Buenos Aires: The devaluation of the peso in 2001, an unstable political system and a poorly performing stock market continued to negatively affect Buenos Aires’ commercial real estate in the second half of 2002. Many banks dramatically reduced credit to companies, which significantly weakened the office sector. Office prices have declined more than 50% (in U.S. dollar terms) since the devaluation and remain at historically low levels. Although office rents have fallen to $8.97 per square foot and attracted interest from foreign investors, few deals were closed. Lack of activity has boosted the availability rate for office space to 25% and fueled a drop in office property yields to 7%. Conditions improved somewhat for the retail sector, with small well-located businesses performing well.

Overall retail rents still dropped slightly to $13.95 per square foot. The industrial sector appears to provide the better option in the long term, with rental rates remaining at $2.39 per square foot. Investors that left the industrial sector in the 1990s have considered re-entering the market following an increase in demand for industrial properties.

Santiago: The retail sector in Santiago showed

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Mexico and Chile have successfully battled regional and global economic weakness. The political reforms initiated in Mexico five years ago have helped the country perform well in spite of its dependence on the U.S. economy. Chile, although small compared to other countries in the region, continues to be a good example for its neighbors. Chile enjoys a stable political system and has implemented market-friendly reforms.

sector witnessed the biggest turnaround in the second half of 2002, after suffering for much of the year through low consumer spending and little new construction. Several new retail developments recently broke ground, including Bosque Real, a residential and commercial property that has already leased 75% of its retail space. Consumer spending has increased and a number of international retailers have opened new stores in Mexico City. Investors were particularly interested in properties leased to international tenants or large tracts of land that can be developed into shopping malls. The industrial market performed poorly in the second half of the year, mainly due to restrictions placed on industrial development in the city center.

$ per sq. ft.

After a decade of positive growth in Latin America during the 1990s, the business environment has become much more challenging. For some Latin American countries such as Brazil, Colombia, Argentina, Uruguay, Peru and Ecuador, the worst political and economic conditions have passed.

These six countries have begun to evolve toward more open economic and political systems and have slowly achieved positive economic growth after experiencing periods of decline. From a political perspective, Brazil, Colombia and Ecuador have great potential to prosper due to new democratic governments, all of which enjoy the support of influential local and international business groups. By the end of 2003, Argentina, Uruguay, Peru and hopefully Venezuela, are also expected to recover from their current problems and enjoy a period of sustained economic growth.

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ASIA

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ASIAN PRIME OFFICE ASKING RENTAL COMPARISON

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Beijing: Growth in demand for good-quality Beijing office space during the second half of 2002 was offset by newly completed office developments. Single office buildings in Beijing are gradually being replaced with mixed-use developments that offer office, retail and leisure space – the under-construction Beijing Fortune Center is a notable example of an integrated retail and office project.

The retail market in Beijing, while still in its infancy, has

Kuala Lumpur: The office market remained weak in Kuala Lumpur in the second half of the year as the market continued to struggle with an oversupply of office space.

There was approximately 15 million square feet of office space available at the beginning of 2003, which will likely take up to five years to be absorbed. Prime office rents, however, remained unchanged at $10.86 per square foot.

Activity in the retail sector was mainly centered around two new shopping malls – Maju Junction and Great Eastern Shopping Mall – both of which opened with above average occupancy rates. Despite previous optimism, it is predicted

per sq. mtr.

Bangkok: There was continued strong demand for prime office locations easily accessible by public transportation. The occupancy rate for prime office buildings within the central business district has increased, and most office properties located near Sky Train stations are fully leased. Prime office rents increased to $12.95 per square foot, with prime office yields rising to 8%. The highprofile Siam Paragon shopping center and hotel located in the heart of Bangkok, adjacent to the Siam Center, is slated for completion at the end of 2005. The retail sector, however, saw average rents decrease to $51.81 per square foot. The industrial property market in Bangkok remained stagnant toward the end of 2002 and into 2003, with very few industrial transactions recorded and little investment in newly constructed factories.

Hong Kong into 2003, pushing up prime retail rents to $452.12 per square foot. Two major new office developments were completed in Hong Kong during the second half of 2002: the International Finance Center’s 1.5 million-square-foot Tower 2 and Charter House, 11 Charter Road. The Hong Kong Monetary Authority purchased 340,000 square feet within Tower 2 for approximately $474 million, and Nomura leased 65,000 square feet within the building. Franklin Templeton Investments and JP Morgan leased a combined 430,000 square feet of space within Charter House. Average prime office rents decreased slightly in the second half of 2002 to $52.60 per square foot. The industrial sector continued to perform poorly, with prime industrial rents decreasing to $6.38 per square foot.

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China remained the most resilient market in Asia in 2002.

Following the country’s entry into the World Trade Organization, Shanghai was selected to host the 2010 World Expo, which should boost real estate investment and development within the city. Hong Kong has not benefited much from the mainland’s high-flying performance, and its office and industrial sectors continued their downward spiral in the second half of 2002. A weak office market prevailed in Malaysia and in Taipei, while Thailand benefited from strong demand for high-quality office buildings in prime locations. The Tokyo property market was sluggish, with no near-term turnaround expected for Japan’s economy.

Hong Kong: The retail sector performed strongly in

$ per sq. ft.

Singapore is expected to record a lower-than-projected growth rate – estimated at 2.2% – for its gross domestic product for 2002. Office availability rates are projected to surge as major office projects are completed, creating an excess supply of office space. The retail sector suffered a setback resulting from a January 2003 increase in the city’s goods and services tax that further dampened retail sales.

displayed enormous potential. Traditional shopping areas comprised of small individual retail stores are expected to be replaced by large shopping malls. Demand for retail services has remained strong among newly-formed residential communities, and these types of retail opportunities have proved popular with investors.

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Global uncertainty resulting from a possible U.S.-led war against Iraq and North Korea’s plans to restart its nuclear program clouded the outlook for the Asian property markets in the second half of 2002. However, many still hope for a peaceful resolution to these unstable situations.

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Singapore: Rising global uncertainty and the regional economic slowdown that most of Asia, with the exception of China, experienced in 2002 continued to affect Singapore’s commercial property market. Prime office prices decreased by about 9% in the second half of 2002, and prime office rental rates fell by 6%. The retail market posted a decline in the number of cash-rich tourists from Western countries, although they were replaced by tourists from the poorer economies of China and India. The retail sector was also negatively affected by a January 2003 increase in the goods and services tax from 3% to 4%, which will be followed by another increase, to 5%, in January 2004. The investment market was generally quiet in all property sectors, although an industrial real estate investment trust launched in November 2002 has attracted considerable interest from investors. Overall, the industrial sector was hurt by the slowdown in the world economy.

Be iji

office space following China’s easing of some investment restrictions on insurance companies. The city’s selection as host of the 2010 World Expo is further expected to boost property investment, development and values in the coming years. The office occupancy rate in Shanghai at the beginning of 2003 was 90%, and the average prime office rental rate was $24.91 per square foot. Shanghai’s industrial market was strengthened by an increase in export volume.

However, the availability rate increased by one percentage point following the addition of 240,000 square meters of new industrial space at year-end 2002. The Bund, Huai Hai Road and Nanjing Road remained Shanghai’s prime retail locations, boasting average rents of $159.41 per square foot.

The limited supply of retail properties in these popular locations could cause prices there to escalate further.

Tokyo: The office market’s performance was less than stellar in 2002. A large number of new office projects completed in the second half of the year increased the office supply by a total of 494,500 square meters. It is predicted that an additional 950,000 square meters of office space will become available this year, which may push up the availability rate from the 4.3% recorded at year-end 2002 to 5.3% by the end of 2003. As no improvement is expected in Japan’s struggling economy, supply is expected to continue to outstrip demand, leading to a potentially steep drop in rents. The retail sector slowed somewhat as consumers continued to reduce their spending. Sales of retail outlets were down by an average of 4% in 2002 compared to 2001 and the decline is expected to continue.

Although the depreciation of the yen in 2002 contributed to an increase in car and electronics exports, the level of exports fell by 6%. This had a negative impact on the industrial sector in Tokyo, with rental rates decreasing.

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Shanghai: There was a surge in demand for Shanghai

the second half of 2002. Traditional business districts such as Tun Nan and Western experienced a decrease in leasing velocity due mainly to the relocation of companies to the Neihu Technology Park. The availability rate for office space in the CBD edged up to 9%, a record high for the past six years. Retail leasing in Taipei maintained its consistent performance in the second half of 2002, proving that the retail sector had recovered and stabilized. Retail properties and hypermarkets were the most attractive opportunities for investors. The industrial market was underpinned by relatively steady demand, which kept potential rental declines to a minimum.

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Seoul: The office market in Seoul, which was very healthy at midyear 2002, suffered through a decline in the second half of the year. The availability rate increased due to South Korea’s recent poor economic performance, and will likely increase further following the completion of major office blocks in Seoul such as Kyobo Life Insurance and Posteel Center. Average office rents, however, remained stable at $14.49 per square foot. The retail sector, the star performer of the Seoul market in the first half of 2002, was also adversely affected, with average retail rents decreasing to $75.32 per square foot. The investment market was not very active, with yields decreasing to 8% for office, 12% for retail and 5% for industrial.

Taipei: Demand remained soft for office properties in

% Yield

that the commercial property market will remain weak in the coming months, with the economy growing at a moderate rate of 4%.

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MARKET FOCUS: EUROPEAN TAX CHANGES BRING MIXED NEWS (continued from front cover) property market. Irish Finance Minister Charlie McCreevy increased the stamp duty on all commercial transactions over = C 150,000 from 6% to 9%. The substantial increase in transaction costs will likely divert investment funds from Ireland to the United Kingdom where transfer taxes are much less. It is estimated that = C 1billion will be invested by Irish investors in the U.K. property market in 2003.

Rumors that the German government will introduce a tougher tax regime for commercial property sale transactions have not helped the struggling German market. The world’s fifth largest retailer, German company Metro, halted the sale of a = C 3 billion property portfolio amid fears that the rumored tax changes would impact negatively on the deal.

EUROPE (continued from page 8) approximately 30%, average prime retail rental rates increased to = C 1,560 per square meter. Phase I of Metropole Zlicin opened in October 2002, and Phase II will be the major new development in the Prague retail sector in 2003.

Demand in Prague’s industrial sector remained stable for both warehouse and industrial space, although older industrial and warehouse buildings in less desirable locations are considered to be unsuitable for the requirements of modern-day warehouse users.

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Lipton 109 Boulevard Haussman 75008 Paris, France Tel: +33 1 5330 0033

Warsaw: Office sector leasing in Warsaw in 2002 dropped below 200,000 square meters, the lowest level of leasing activity recorded since 1997. Economic uncertainty led to a number of tenants postponing their space requirements, although it is hoped that these will be reconsidered in 2003. The retail sector continued to benefit from a high level of investment in the commercial real estate market. Heitman Capital Management, GE Capital Golub Europe, ING Asset Management and Rodamco Europe were particularly active in the second half of 2002. Retail rents held steady at = C 360 per square meter, principally due to two dominant new developments: Wola Park and the opening of Phase II of Galeria Mokotow. Rodamco acquired 50% of Galeria Mokotow at a yield of approximately 10.25%. Clothing retailer H&M has committed to opening its first store of 1,300 square meters in Wola Park. Yields in all sectors fell slightly with the prime office yield decreasing to 9.5%. Industrial rents also stabilized due to weak economic growth.

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www.globalpropertyalliance.com Global Property Alliance is a strategic alliance between a limited number of prominent, independent real estate firms worldwide.

For media inquiries contact Alison Miller at Julien J. Studley, Inc., tel: +1 212 326-1074 or email: amiller@studley.com.

The information in this report is obtained from sources deemed reliable. No representation is made as to the accuracy thereof.

U.S. statistics compiled with the support of CoStar Group.

Copyright © 2003 Global Property Alliance