LONDON and NEW YORK – Real estate is shaping up as a key weapon in improving corporate bottom lines in 2003 - but that weapon will be wielded within an extremely tough business environment. That's part of the picture in the new 2003 Worldwide Property Report just released by Grubb & Ellis (G&E at www.grubb-ellis.com) and Knight Frank (KF at www.knightfrank.com).

2003'S TOP TWO IN OCCUPANCY COSTS: London (pictured left) will be 2003's highest-cost market for warehouse/distribution space, at $19.05 a sq. ft., while Tokyo (right) will top the totem pole in terms of Class A office-space costs, at $113.12 a sq. ft., the 2003 Worldwide Property Report projects.

        "One of the key reasons we plan on conducting this study for years to come is that the real estate cost - which for most companies is the second-highest cost of doing business behind human-capital expenses - is moving out of the classification of 'necessary evil' and into the boardroom as a significant planning consideration for global expansion," said Bob Bach, Grubb & Ellis national director of market analysis and head of the New York-based firm's Global Market Intelligence Group.
        The 2003 Worldwide Property Report emphatically underscored real estate's central role in the new year:

OFFICES FOR RENT: Seattle (pictured) will experience the biggest drop in 2003 office rentals, plunging 6.1 percent, said the 2003 Worldwide Property Report

        "In 2003, corporate users are evaluating both labor and real estate as the cornerstones of a pro-active strategy to improve overall productivity," the report noted. ". . . This proactive approach not only seeks to cut costs, but also to better align the work force and operational goals."
        Likewise, the report emphatically described 2003's degree of business difficulty for real estate operations.
        "Corporate America is setting sail on another year filled with economic uncertainty, intense global competition, heightened geopolitical tensions and severe profit pressures," said the report. "Its leaders once again must tighten their belts and find ways to operate leaner, meaner, faster and more efficiently. And real estate can play a leading role."
        Some real estate arms' roles in 2003 may be appreciably aided by the market conditions limned in the newest Worldwide Property Report. High vacancy rates and falling occupancy costs now pockmark much of the landscape.
        Here's a capsule look at the report's findings on U.S. industrial and office markets:

Industrial Rents, 2003: Top 10 Markets for Projected Increases Market Forecast % Rental Growth 1. Sacramento, Calif. 6.1% 2. Austin, Texas 4.2% 3. Fort Lauderdale, Fla. 4.1% 4. San Antonio, Texas 3.9% 5. West Palm Beach, Fla. 3.4% 6. Louisville, Ky. 3.2% 7. Houston 2.9% 7. Richmond, Va. 2.9% 9. Atlanta 2.8% 10. Los Angeles 1.9% Source: 2003 Worldwide Property Report

Industrial Most Bullet-Proof Sector

The industrial sector has fared best in the market in terms of continuing corporate interest, the 2003 Worldwide Property Report noted.
        "One tradition that seems to hold up in the face of globalization is that the on-the-ground costs for non-office space business uses are the most stable among real estate-related costs of doing business anywhere on the globe," said Steve Mallen, head of global research at London-based Knight Frank.
        "The industrial market is living up to its reputation for stability during tough economic times," the 2003 Worldwide Property Report explained. Granted, industrial landlords definitely felt primal fear in early 2002, as U.S. industrial vacancy rose to 8.9 percent. "But then the market stabilized, and the vacancy rate fluctuated around 9 percent for the remainder of the year, well below its peak of 13.7 percent following the last recession," the report continued. The industrial sector, it explained, was steadied by "a modest rebound in demand, coupled with declining new supply."
        Similar trends promise a comparatively strong U.S. industrial market in 2003, the 2003 Worldwide Property Report explained. The report predicted "low but positive absorption through the first quarter of 2003, [with] the vacancy rate . . . likely to remain around 9 percent through most of 2003 and then move below 9 percent by year-end."

San Jose Industrial Rents Rank
As 2003's Biggest Projected Drop

Many markets' industrial rates will drop in 2003, the report projected.
        Not unexpectedly, the biggest industrial rental decline is predicted for San Jose, Calif. With "the continuing layoffs in the high-tech and software industries," the city's industrial rents will decline by 10 percent in 2003, the 2003 Worldwide Property Report projected. Even so, San Jose will still remain among the top five U.S. markets for industrial rentals at $6.16 per square foot, the report added.
        Industrial rents will also decline in the most expensive U.S. industrial market, Orange County, Calif., the G&E/KF report projected. Orange County rentals will drop by 3.5 percent in 2003, it said. Nonetheless, the Southern California area will still set the U.S. high-cost industrial standard, coming in at $6.60 a sq. ft., the report forecast.
        On the other side of the coin, 2003's biggest industrial rent increases will come in Sacramento, Calif. (rising 6.1 percent); Austin, Texas (up 4.2 percent); and Fort Lauderdale, Fla. (a 4.1 percent up-tick), according to the report's projections (see accompanying chart for the projected top 10 markets for industrial market rental growth).

Office Rents, 2003: Top 10 Markets for Projected Increases Market Forecast % Rental Growth 1. Fort Lauderdale, Fla. 3.3% 2. West Palm Beach, Fla. 2.8% 3. Cincinnati 1.0% 3. Sacramento, Calif. 1.0% 5. Charlotte, N.C. 0.7% 6. Miami 0.6% 7. San Antonio, Texas -0.2% 8. Detroit -0.3% 9. Cleveland -0.6% 10. San Diego -1.0% Source: 2003 Worldwide Property Report

Office Woes Continuing?
Rents Will Fall In Four of Projected 'Rental Growth' Top 10

Many real estate operations may find considerably greater cost-cutting options in 2003 in a U.S. office market that continues its struggles.
        Fort Lauderdale, Fla., the projected No. 4 market for 2003 industrial rental growth, is the G&E/KF report's predicted No. 1 market for office rental growth. With projected growth of 3.3 percent, Fort Lauderdale is one of three Florida areas in the report's top 10 markets for 2003 office rental growth (see accompanying chart for the projected top 10 office markets for rental growth).
        At the same time, though, even the predicted rental-growth top tier underscores the overall office sector's doldrums. Four of the predicted top 10 for office rental increases - San Antonio, Detroit, Cleveland and San Diego - will actually register negative 2003 office-rental gains, the report projected. But with the overall market's difficulties, those four areas still rank in the report's top 10 for office rental increases. West Coast markets lead in the report's projections for the biggest office-rental drops. Seattle office rentals, for example, are predicted to drop 6.1 percent, followed by San Jose, with a 5.8 percent plunge, and Oakland, Calif., with a 4.5 percent drop.
        "Asking rents for direct lease space, since peaking in late 2000, have declined by 20 percent in CBDs and 12 percent in suburban areas . . . for both Class A and Class B space," the 2003 Worldwide Property Report noted.
        In fact, office absorption in 2001 and 2002 was minus 100 million sq. ft. (9 million sq. m.), "the only two years on record when absorption has been negative since Grubb & Ellis began tracking market data in the mid-1980s," the report observed.
        That scenario clearly favors corporate end users. "[Office] landlords are offering increasingly generous concessions to attract and keep tenants," said the 2003 Worldwide Property Report. "Free rent is the norm, ranging from a few months up to one year on a five-year lease."
        For office landlords, though, the market promises a long, hard road to hoe: "The [office] market," concluded the G&E/KF report, "could take the better part of the decade to return to equilibrium."