US Real Estate Review Use V3 - colliersparrish.com · UNITED STATES 2004 Colliers International US...

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Colliers International US Real Estate Review

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Colliers Research

Colliers Research is recognized as one of the most reliablegroups in the industry in the compilation and dissemination ofreal estate research.To assist in the evaluation and comparisonof real estate options, Colliers researchers provide multi-levelsupport, ranging from data collection and analysis to comprehensive market, economic, and demographic analysis.

Colliers Research has developed powerful technological tools to provide clients with valuable market intelligence.Our expansive databases houses detailed information on properties nationwide, historical supply, demand, absorptiondata, and transaction comparables. Research uses this informationto produce quarterly surveys of office and industrial markets in over 50 U.S. cities. Market highlights reports based uponthese surveys include inventory, vacancy, absorption and rentalrates in side-by-side comparisons for these cities as well asquarter-to-quarter comparisons and aggregated national statistics.Investment sales prices and cap rates are reported as well.

Colliers research professionals closely track current local,national, and global economic and demographic trends and theireffects on commercial real estate markets. Research groupsacross the country also have expertise in location and siteanalysis, geographic information systems, and financial modeling.To ensure that our clients’ real estate decisions are thoroughlyinformed, our researchers perform numerous financial analyses.Options include comprehensive occupancy cost comparisons forpotential lease locations and complicated lease vs. own scenarios.

The information contained herein has been obtained fromsources deemed reliable.While every reasonable effort hasbeen made to ensure its accuracy, we cannot guarantee it.No responsibility is assumed for any inaccuracies. Readers areencouraged to consult their professional advisors prior to actingon any of the material contained in this report.

Colliers International 2004

Editor – Garrick Brown, [email protected]

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1 Letter from Margaret Wigglesworth, President and CEO

2 Letter from Ross Moore, Vice President and Director of Research

3 Office Market Overview

7 Industrial Market Overview

11 Retail Market Overview

15 Investment Market Overview

19 US City Overviews

76 Global Office Occupancy Costs

78 Glossary

United States Real Estate Review Contents

colliers.com

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To Our Clients and Colleagues,

It is with great pleasure that we present Colliers International’s 2004 US RealEstate Review to our valued clients and colleagues. We appreciate that, intoday’s world, it is imperative to have the best information as companies navigate very uncertain economic waters. The US Real Estate Review isdesigned to provide you with the market information you need, and the analysis behind the numbers so you can make the best decisions for your firm.

Colliers has never wavered from its commitment to provide the best information to clients. From market data to objective business advice, you can count on your Colliers advisor to provide you with the information youneed.We have substantially increased our commitment to technology, allowingus to deliver the most accurate information even faster. Our unparalleled global reach, with more than 238 offices worldwide, allows us to provide you with objective data, no matter how remote the location.

Last year was challenging for Americans in many respects, but we are aresilient nation and already we see signs of improvement in the business climate. Transaction volume is increasing, economic indicators have improvedand consumer confidence has regained equilibrium after a period of downward movement.While we do not forecast dramatic improvement in the commercial real estate industry for 2004, we do predict that the worst is over and corporations will once again consider expansion. No matter what happens, Colliers will continue to bring you the objective informationand insightful analysis required to make sound business decisions.

That is our commitment to you.

Margaret S.WigglesworthPresident & Chief Executive OfficerColliers International USA

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“The More Things Change,the More They Stay the Same”As you read through this year’s US Real Estate Review you will probably feelas though change is all around us and all the things our industry has long takenfor granted no longer apply. Changes in technology, the outsourcing of whitecollar jobs to foreign nations, changing demographics, the threat of terrorismand apparently robust economy yet an almost complete absence of new hiringhave left many wondering what has happened to the world we used to know, andwhat does this mean for the future of commercial real estate.These concernsare legitimate but shouldn’t divert our attention from the inevitable growththat will occur as the next cycle begins. Change in one form or another has been with us for some time and as an industry we have adapted to thisconstantly changing landscape and there is no reason to think this will stop.

With that said, it would be pure folly to say the next 10 years will be like thelast 10.The economy will continue to ebb and flow – and grow – and jobs willbe created, perhaps not at the same rate as we have seen over the past 30years, but there will be growth.The talk of millions of jobs being transferred to Asia and Eastern and Central Europe are surely exaggerated with manycompanies realizing that there is a limit to what can be effectively outsourcedand yet still produce a quality product or service.There is no doubt, globalizationis starting to intrude into the white collar world, but this opening up of marketswill almost certainly be a source of growth and not the other way around.Changes in technology and demographics will be other factors that will alterthe status quo, but as the late 1990’s showed us, technology can also be a hugeboost for the real estate world.As the current economic recovery gainsstrength, as we believe is happening, there will be great opportunities for many,but they may not be in the traditional areas that we have looked to in the past.

The past year has been a challenging one for landlords, and a wonderfulopportunity for tenants, who have been spoilt for choice with multiple options– and all at very reasonable prices. Both office and industrial rents continuedto drift lower in 2003 after dropping precipitously in 2001 and 2002, and goingforward are unlikely to register any significant increases for some time tocome. For office and industrial markets new construction has dropped to levels that mean little or no new supply after accounting for obsolescence.Retail remains a bright spot and is likely to continue so.The key, as always, isdisposable income, and with many Americans in their prime earning years theoutlook for owners of retail properties is very positive.The investment salesmarket, which had a very active year, is sure to stay busy, with an abundance ofcapital and a keen appetite by a wide variety of buyers.The obligatory caveathas to be interest rates, which we don’t anticipate rising significantly this year, butwill eventually rise, dampening buyer’s appetite.All things considered, 2004 shouldsee a return to a more normal market despite the change that is all about us.

Ross MooreVice President and Director of [email protected]

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Throughout 2003, commercial real estate wasat an unusual juncture—generally weak leasingmarkets and strong investment markets.In the case of the U.S. office market, this wasdefinitely the case as vacancy reached 16.5%by the close of 2003. This marks a modestincrease of 20 basis points from the 16.3%vacancy recorded as of the close of 2004.Yet, while these increases paint a rather lackluster picture of activity throughout theyear, the news is not all bad. The relative stability of office vacancy throughout 2003suggests that the peak for this cycle has mostlikely been reached for the U.S. office market

as a whole. While some markets appear to be at or near bottom, in others we arealready witnessing various degrees of recovery beginning to occur. Just as thesetrends vary from market to market, they alsohave varied depending upon Class and location.More importantly, there are a number of positive factors present now that were not in place just one year ago. Despite the slightincrease in overall vacancy, occupied spaceincreased over the final three quarters of the year. This stands in stark contrast to the occupancy losses that have defined much market activity since 2001.

While vacancy may not have improved sinceyear-end 2002, activity picked up significantlyin 2003—particularly over the final part ofthe year. Fourth quarter absorption totaled11.6 million square feet, slightly below the11.8 million square feet recorded in the thirdquarter. This brought year-to-date absorptionto 27.0 million square feet and marked threeconsecutive quarters of occupancy growth in 2003. By comparison, overall absorptionthroughout the U.S. office market in 2002amounted to negative 37.7 million squarefeet. Again, most absorption occurred in thesuburbs with CBD absorption totaling just1.8 million square feet while suburbanabsorption registered 8.1 million square feet.For the year, Class A suburban absorptionaccounted for 81% of total absorption.

While the return of positive absorptionmarks a significant turning point, this has not yet translated into decreased vacancy or

rental stability. Downtown rents dropped4.0% for the year to a weighted average of$32.00 per square foot. Suburban rentsdeclined 1.3% for the year to a weightedaverage of $23.60 per square foot. While thesedeclines should greatly concern landlords,it is apparent that—at least in the case ofsuburban rents—that the market has alreadyhit bottom. While suburban rents declinedfor the year as a whole, they posted anincrease of .4% over the final three monthsof the year. This compares with 2002 whendowntown rents fell 12.5% and suburbanrents dropped 9.5%. While many markets are still recording slight declines, the marketas a whole is no longer in a free fall. In someselect markets rental rates are already beginning to post gains, however for the U.S.as a whole we expect rents to continue tostabilize over the first half of 2004 and tobegin to gain traction nearing 2005.

FIRST POSITIVE ABSORPTION SINCE 2000

US OFFICE MARKET SHOWS MODEST GROWTH

Office Market Geared for Recovery

Office Market Overview

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IMPACT OF SUBLEASE AND “SHADOW SPACE”

Despite the fact that it is gradually lessening,sublease availability remains a factor throughoutthe U.S. Vacant space available on a sublease basisfell by just under a million square feet during thequarter to register 115.9 million square. This leftsublease space representing just 15.8% of totalvacant space. This compares with a year ago whenvacant sublease space registered 20.5% of vacantspace. The good news is that the sublease overhangis slowly disappearing. The bad news is that this isnot so much due to leasing activity as it is to leasessimply expiring. Thus, much of this space simplybecomes available directly from the landlordsthemselves. It should alleviate some of the pressures on rental rates, however, as desperatesub-lessors increasingly disappear from the scene.

Further complicating the picture is the impact of“shadow space.” This sister-trend to the subleasephenomena also follows declines in the overalleconomy as space users cut their workforce and diminish their needs for office space.While sub-lessors attempt to return their unusedspace to the marketplace, companies with “shadowspace” do not. Instead, they simply keep it readyfor eventual economic recovery. As such, it is estimated that companies may not be using anywhere from 5% to 10% of leased space thatthey can refill when hiring resumes. This furtherelongates the lag-time between economic growthand job creation and the positive absorption ofoffice space.

CONSTRUCTION DECLINES—GIVING MARKET TIME

One of the major factors impacting market equilibrium is that of new construction.Throughout the U.S., roughly 59.0 million square feet of new product came online in 2003.This marks a significant decline from 2002 whenoffice construction totaled 96.7 million square feetand 2001 when construction reached 135.7 millionsquare feet. Markets that contributed most of thenew construction during the fourth quarter included

Chicago, Dallas, midtown Manhattan, NorthernNew Jersey, Northern Virginia and Washington,DC. The good news is that new development isexpected to continue to decline in 2004, with mostnew construction focused on build-to-suit projectsor buildings with heavy pre-leasing commitmentsalready in place. This should be a positive factor in bringing the market closer to balance.

OFFICE SALES CONTINUE

On the investment front, weak fundamentals havebeen more than offset by low interest rates andthe prospect of sustained economic recovery.Despite the recent strong performance of thestock market, real estate remains high on investorswish list—even office space, despite the challengescurrently faced by many landlords. In 2003, CBDoffice sales were up 6% and Suburban office sales

10% over 2002 levels. Office investment sales volume topped $115 billion in the U.S. during2003, fueled by a diverse group of buyer profilesand an ample supply of capitol. The strength ofactivity causes some concern for a possible assetbubble depending upon how slowly leasing demandimproves or how significantly interest rates increasein the near future.

WHERE ARE THE JOBS?

Normally, with the economy rebounding and businesses feeling more confident, a significantupturn in demand for office space would follow.Yet, from November 2001 until just recently, theU.S. economy experienced a “job loss” recovery.A primary cause of this was a surge in productivitygains as the productivity growth rate nearly doubledthe GDP growth rate. The economy must growfaster than productivity in order to create real job growth and while this has translated into theUnited States possessing the highest worker productivity growth rate in the world by far (and also remaining a major target for business and investment), it also resulted in job loss despiteeconomic growth. The good news is that this

trend seems to have reversed itself as 2004 cameto a close. Unemployment rate ticked down to5.6% as of the close of the year, after peaking atnearly 6.5% in May of 2003. While job layoffs persist, they are not at the levels experienced earlierin the year. Employment growth is finally outpacinglayoffs, but job growth remains extremely weak andthis reluctance to hire is an obvious impediment tofurther demand for office space. Unfortunately, itis most likely to remain the case for the foreseeablefuture. Reluctance to hire, in combination with themove by corporate America to outsource non-corefunctions to low cost regions of the globe, will putfurther downward pressure on the overall demandfor office space.

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HOW BIG IS THE THREAT OF OFFSHORING?

Anything that causes a significant loss of officerelated jobs is clearly going to have a negativeimpact on the U.S. office market as a whole.India, with two million college graduates and 80%fluency in English, remains the most attractive offshoring location, but China, Russia, Malaysia andthe Philippines are also making strides. The mainadvantages cited by employers who offshore aresignificantly lower wages and round-the-clockshifts. And, yet, offshoring has remained mostly anAmerican phenomenon, having very little impact yeton the Canadian or E.U. economies. According toForrester Research, offshoring will account for 3.3million jobs lost by 2015. The vast majority ofthese jobs have been back office or call centerpositions. While the average ratio of space peroffice worker is roughly 200 square feet of spaceper worker, and the average ratio of space per callcenter/back office employee is 100 square feet ofspace per worker, then this translates to a reductionin overall demand for office space of a frightening330 to 660 million square feet of space by 2015.

Despite this, the fears of the impact of offshoringmay be a bit overblown. While certain sectors of

the economy are clearly candidates for this phenomena, it is vital to note that not all servicejobs can be shifted offshore. Paper-based, backoffice jobs are those most prone to offshoring,while the entertainment, tourism, health and education sectors are likely to remain relativelyuntouched by this trend. Indeed, according toForrester Research, 60% of all Fortune 1,000 companies are not involved in this trend at all.While offshoring is bound to radically change theway in which companies do business—and, in theprocess, have a widespread impact on commercialreal estate—a factor that has not been discussed inthis debate is the impact of the coming demographicscrunch. As the Baby Boom generation begins toretire in a few years, the U.S. will feel the impact ofa significant labor shortage. It is estimated that theU.S. will require an additional 8.6 million workersover the next 20 years just in order to replaceretirees. So the long term forecast is that lossesdue to offshoring will be far outpaced by lossesdue our pending labor shortage. However, in theshort term look for this to remain a hot buttontopic, and one that will continue to negativelyimpact office markets throughout the U.S.

Looking ahead

The U.S. economy, while expanding rapidly, has yet to produce consistently strong job growth ascompanies of all sizes and in almost all industriescontinue to improve efficiencies and drive productivity levels higher. Cost reductions remainthe mantra for most businesses and as a resultnew hires remain the exception. Looking ahead,we anticipate positive absorption in 2004, but notsufficient enough to change market fundamentals in a major way. As we have been saying for sometime, market conditions still favor the tenant andrepresent a considerable challenge for landlords.However, look for the landlords negotiating position to gradually improve throughout 2004.We expect incentives such as free rent or enhancedtenant improvement allowances to decrease as theyear wares on, although little to no rental growthoccur. Tenants looking for the best deal will have alimited window of opportunity early in the year asthe market slowly moves toward recovery.

Offshoring will continue to be a factor, despite thefact that a new sense of protectionism seems to berising in this election year. Currently before the

Senate is a bill that threatens to bar Americancompanies from subcontracting government workto foreign companies. The move is specificallyaimed at India, however, such contracts account foronly a miniscule amount of the work outsourcedto India and so if even this bill passes, it won’t takemuch of a bite out of this trend. Meanwhile, subleaseavailability and “shadow space” will also place adrag on the recovery, although both will decline as the year progresses.

Look for interest rates to tick up slightly, but tostill remain low. With leasing markets past theworst, look for continued investment interest inoffice properties—despite the fact that interest rateswill likely rise near the five percent mark by theend of the year. Prices have likely peaked in mostmarkets and it is likely that investor demand maycool slightly later in the year. In the meantime,look for continued stabilization and, in some well-positioned markets, modest recovery to begin to take place as moderate leasing activity and reduced new development combine finallybegin to push vacancy back downward.

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Following two years of increasing vacancy and negativenet absorption, the U.S. industrial market finally stabilizedin 2003. As of the close of the year, vacancy stood at10.1%, only 10 basis points up from one year ago. As ofyear-end Raleigh posted the highest vacancy rate in thecountry with 27.3% and Los Angeles the lowest at 3.6%.While today’s numbers indicate an increase from thoserecorded just one year ago, there are some positives tonote. It appears that the market has finally bottomedout and that recovery has already started to occur inmany U.S. markets. Some markets began to recorddecreasing vacancy and positive absorption as early asthe third quarter of this year, with many more markingthis trend during the final three months of the year.Better yet, most markets that we survey indicate a significant rise in tenant interest and activity as the yearcame to a close, which should translate into this trendcontinuing and expanding during the first half of 2004.

Clearly, current overall economic conditions are beingmirrored by the performance of the U.S. industrial market as a whole. Solid economic growth occurredover the final half of the year, with GDP growth in thethird quarter topping eight percent. Meanwhile, the “jobloss” recovery that had been in place since November of 2001 finally ended as job creation, albeit very tepid,began to occur over the final months of 2003. As far ascommercial real estate goes, these trends are beingreflected more quickly by the industrial sector than theoffice sector for a number of reasons. Primary amongthem is the fact that industrial buildings almost invariablyhave a shorter construction time than office product, andso developers can react much more quickly to marketconditions in terms of the amount of product they arebringing to market. As a result, overbuilding was not asignificant factor throughout the recent downturn for

MARKET POSITIONED FOR RECOVERY

Industrial Finishes 2003 on Positive Note

Industrial Market Overview

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Positive Signs for U.S.Industrial Warehouse Market

Durable Goods/New Orders Up 7.8%

Imports and Exports Both risingsharply

Inventory/Sales Ratio Ratio stands at 1.29; was1.44 in 2001

Manufacturing/New Orders Up 6.6%

Consumption Up 3.7%

Retail Sales Up 6.7%

(All data for 2003)

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WAREHOUSE SPACE REMAINS STRONGEST

In recent years, modern bulk warehouse structures, offering 100,000 square feet or moreand clear heights upwards of 30’ have dominatedboth new development and demand on a nationallevel. As the U.S. economy continues to shift from a manufacturing to service economy, thesebuildings—geared towards distribution uses—havereplaced manufacturing space as the dominantindustrial product type. In the markets that wesurvey, manufacturers accounted for less than one third of all leasing throughout the recentdownturn. Meanwhile companies focused ontransportation/distribution, logistics and tradedrove roughly half of all leasing. So, it should come as no surprise that warehouse space continues to be strongest industrial product type throughout the U.S. market as a whole.

Following a rocky start, demand for warehousespace picked up steam by mid-year. Vacancy forwarehouse product stood at 10.1% as of the closeof the year, down from the 10.2% mark recordedin June. Warehouse space finished the year on ahigh note, recording a very respectable 25.4 millionsquare feet of positive absorption over the finalthree months of the year. This total is just 3.5 million square feet shy of the 28.9 million squarefeet of absorption that occurred during the thirdquarter and brought the market to an overall total for the year of 56.8 million square feet.More importantly, it marks a remarkable turnaround from 2002, in which the market lost 29.8 million square feet of occupancy.In the fourth quarter of 2003, 39 of the 51 markets, or 76%, recorded positive absorption.

Industrial completions for the year stand at 95.0million square feet versus the 119.2 million squarefeet of new development that came to market in2002. This decrease in new construction was yetanother factor in the decreased vacancy recordedover the final half of 2003, in essence giving themarket a “breather” in which to absorb existingvacant space and tilt the pendulum back towardsequilibrium between supply and demand.The markets where new construction exceededone million square feet in the fourth quarter wereBaltimore (1.6), Chicago (3.6), Dallas (2.6),Indianapolis (1.0), Kansas City (1.2), Los Angeles(2.2), Memphis (2.5) and the Inland Empire (2.1).Future construction moved marginally higher in thefourth quarter with under construction levelsincreasing by 3.3 million square feet to register62.7 million square feet.

Despite the strong performance of warehouseproduct, rents were down as a whole in 2003.While Warehouse/Distribution space remainedsteady at $4.70 per square foot on an annual basisand Bulk Warehouse space also remained at $4.00per square foot on an annual basis, rental rates forFlex/Service and Tech/R&D product experienceddeclines. As of the close of 2003, average leaserates for Flex/Service space stood at $7.60, downfrom $7.70 per square foot just one year ago.Meanwhile, average rents for Tech/R&D productdeclined from $9.60 per square foot in 2002 totoday’s total of $9.20 per square foot, annually.The increased stability of the market should translate into rents holding their own throughout2004, with the potential of minor rental growth bythe end of the year. Significant rental growth willnot likely occur prior to 2005.

most of our surveyed markets. Meanwhile, occupancygrowth for industrial product is not as stronglylinked to employment as is the office sector.Instead, what drives industrial absorption are factors such as manufacturing/new orders, whichrose 6.6% in 2003, and durable goods/new orders,which increased by 7.8% throughout the year.Imports and exports both rose sharply in 2003,fueling more demand for warehousing space.Retail and wholesale activity also is a driving factor,

with retail sales up almost seven percent throughthe year. With all of these factors continuing totrend upwards, it appears that the worst is overand the market is positioned for recovery in thecoming year although the market will continue tostruggle with the manufacturing sector, which hasincurred 41 consecutive months of employmentlosses, thanks to a combination of increased productivity and the outsourcing of manufacturingjobs overseas.

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INDUSTRIAL SALES SOAR

Even as the leasing market took significant hitsover the past three years, the market for industrialinvestment properties has done exceptionally well.In the face of stock market turbulence, Enron-likescandals and an uninspiring bond market, interestin real estate investment rose considerably. Add tothe mix interest rates at 40-year lows and youhave the recipe for a feeding frenzy. The impact of cheap money has meant that buyers could consider buildings that would otherwise not offerrates of return that would generate interest.And so, increased vacancy throughout most U.S.markets has not significantly impacted demand for

industrial investment. What has impacted salesactivity in many metropolitan markets, however,has been a lack of available product. Many would-besellers, facing the prospect of little quality inventoryto trade into, have opted not to sell. Looking ahead,with increases in interest rates probable as theoverall economy picks up steam we expect thistrend to decrease slightly. However, newer,institutional-quality industrial buildings—particularlythose with tenants already in place—will continueto be in strong demand in most markets throughout 2004.

INDUSTRIAL UNLIKELY TO BREAK ANY RECORDS IN 2004 BUT LOOKS SET TO POST HEALTHY GAINS

After two and a half years where demand forwarehouse space was absent, all indications arethat the coming year will be good for owners ofindustrial real estate. Economic indicators remainpositive, with rising factory orders and increasingexports recorded at the close of 2003 and job creation finally beginning to occur once again.

Expect moderate recovery to begin to occurthroughout most markets as the momentum continues to build as we head towards 2005.The economy posted very strong growth over thefinal half of 2003 and the consensus forecast is forabove average growth throughout 2004. This hasalready resulted in two quarters of healthy expansion and good leasing activity and this trendshould continue in the coming year. Look forvacancy and the amount of available space in the

marketplace to decline, although likely at a slowpace. Although industrial fundamentals willimprove as the year progresses, rents are unlikelyto register any significant gains prior to very late in the year, if at all. As has been the case for thepast several years, the primary warehouse and distribution markets consisting of Atlanta, NewJersey, Chicago, Dallas and Los Angeles are expected to again be prime sources of growth.These five markets in aggregate accounted for70.3% of absorption in 2003 and they may be theexception when it comes to posting significantpositive rental growth in 2004. New constructionwill pick up throughout 2004, although the emphasis will continue to be on build-to-suit development in most markets. Look for 2004 to be a year of moderate recovery as supply anddemand move towards parity in most U.S. markets.

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Throughout the recent economic downturn,consumer spending was one of the forcesthat kept an otherwise stagnant economyafloat. This translated into retail propertiesremaining one of the least negatively impactedof all commercial property types since themarket turned in 2001. Retail product consistently experienced less vacancy, morepositive absorption and more rental rategrowth than office or industrial space in most major U.S. markets. This led to retailproperties being a favorite of the investmentmarket, as investors sought to capitalize onthese positives while interest rates were athistoric lows. Private investors as well aspublic and private REITs were actively pursuing acquisitions throughout 2003.Retail properties have also begun to attract significant foreign capital. Our data indicatesoverall 2003 investment sales volume of over$115 billion, with retail investment properties

posting the most gains, increasing 22% overallthroughout the course of the year.

Retail fundamentals remain strong.Low interest rates and the refinancing boomput more cash in the pockets of homeowners,as have federal tax cuts. This buying poweremerged in full force in 2003 with a spendingspurt towards year-end that caught manyretailers by surprise as a number of nationalchains reported inventories too low to meetdemand over the holiday season. All of thesefactors lead to some promising statistics bythe close of 2003. The inventory to salesratio is considerably lower, indicating bothincreased sales and more cost efficiency.New orders were up 6.6% and imports and exports were both rising sharply.Most importantly, both consumption andretail sales increased significantly over thecourse of the year.

Revised 2003 Sales figures from the USCensus Bureau indicate sales growth of 5.6%for all retail stores and even stronger growthfor select segments of the retail market.Warehouse Clubs and Superstores registeredthe strongest growth last year, which shouldcome as no surprise. Consumers spent over$218 billion at these stores last year, markinga 13.0% growth in sales from 2002.Household appliance stores performedstrongly with 10.9% growth and GasolineStations and Fuel Dealers came up big withgrowth of 9.3%.

Not only are consumers spending more thanthey did last year, but they continue to shiftthe ways in which they spend. The rise ofthe big-box discounter represents a seismicshift in the way that consumers shop.Since the 1990s, big box retailers have beencutting into the market share of traditionaldepartment stores. Total market share fordepartment stores, as defined by percent ofoverall sales, has declined from over 60% to40% in less than ten years. Department storessimply have not been developing sales volumeand this will result in more belt-tightening.

Retail Market Overview

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Big Box Domination

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Drug Store Wars

Pharmacies and Drug Stores continued to performwell in 2003, recording sales growth of over seven percent through the year. Drug store expansionhas been one of the major retail stories of the pastfew years and will continue to be in the future.Going forward new drugs being rolled out and thenew Medicare bill scheduled to go into effect in

2006 will combine with an aging population todrive more drug store expansion. Look for drugstore wars to break out in many markets, as CVS,Walgreen’s, Rite Aid and Eckerd continue to battleit out amongst themselves as well as with Target,Wal-Mart and grocery store chains such asAlbertson’s and Safeway.

Looking Ahead

Smaller discount concepts will continue to grow.They have a greater return on investment thanWal-Mart and can turn over goods faster than they have to pay for them. Wal-Mart will have to choose between price and margin, convertingless to volume and more to margin and this willgive their competition some breathing room.Discounters like Dollar Stores, Dollar Tree,Fred's Discount, Sav-a-Lot and Trader Joe’s will be the new business model to beat. But makeno mistake, big box dominance is hardly threatened by these upstarts. Wal-Mart is here to stay,whether you love it or hate it.

Meanwhile, the lack of new products and concepts will continue to hold down spending.Consumers are bored right now. They will paywhat they have to pay if they are given somethingnew to get excited about. With consumers feelinguninspired by the same old selection we will seemore interest in international retail coming to theUS like IKEA, H&M, Zara and Eddie Rodriguez

(a new Latin menswear concept). Urban retailingis the next frontier. TJ Maxx is rolling out a new AJ Wright concept and Ross will do the same.A good marriage to watch is the Bed, Bath &Beyond purchase of Christmas Tree Stores.Construction starts were up in 2003 but will beginto slow down as start-ups will take longer to getoff the ground. The CAVE people (citizens againstvirtually everything) will impact more and moredevelopment. Meanwhile, the success of town centers and lifestyle centers are fueling moregrowth for this type of retail development.

Look for 2004 to be a year of continued retailstrength. Consumer spending and low interestrates kept the economy afloat over the past twoyears. While interest rates will remain low, therewill likely be some modest increases by the end of 2004. However, now that other economic fundamentals are gaining momentum, look for consumer spending to grow in the coming months.

High-end stores such as Nordstrom’s and NeimanMarcus continue to do well, but sales for mostothers will continue to flatten. Chains such asPenney’s, Sears and Kohl’s are caught in the middle.Target and Wal-Mart are upping the ante for theseplayers. Sears will be the heavy loser.

This trend has since expanded to include grocersand drug stores with the addition of Wal-Mart’s“Super Store” concept. It has only been a few

years since Wal-Mart began adding grocery anddrug components of 80,000 square feet or more to their stores, but in that time they havesurpassed all other grocery chains in terms of dollar volume and are now the world’s largest grocer. In markets with a Wal-Mart presence therewill be tremendous pressure on grocery and drugstores. Only one or two top grocery chains ineach market will survive.

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All Stores 3,780,583 3,580,012 5.6%

Motor Vehicles and Parts Dealers 904,458, 852,689 6.1%

Gasoline Stations 263,302 240,873 9.3%

Food and Beverage Stores 508,512 490,795 3.6%

– Grocery Stores 457,845 442,971 3.4%

– Beer,Wine and Liquor Stores 32,470 31,324 3.7%

Health and Personal Care Stores 191,620 180,180 6.3%

– Pharmacies and Drug Stores 164,004 152,973 7.2%

Building Material and Garden Equipment Stores 323,060 300,932 7.4%

– Building Material and Supplies Stores 282,670 264,751 6.8%

– Hardware Stores 15,253 15,295 -0.3%

General Merchandise Stores 476,143 455,674 4.5%

– Department Stores 217,861 225,912 -3.6%

– Warehouse Clubs and Superstores 218,697 193,541 13.0%

– All Other General Merchandise Stores 39,585 36,221 9.3%

Clothing and Accessories Stores 178,614 171,874 3.9%

– Men’s Clothing Stores 10,167 9,926 2.4%

– Women’s Clothing Stores 35,414 34,331 3.2%

– Family Clothing Stores 62,002 59,355 4.5%

– Shoe Stores 21,976 21,785 0.9%

– Jewelry Stores 26,848 25,131 6.8%

Furniture, Home Furnishings, Electronics and Appliance Stores 195,588 185,074 5.7%

– Furniture Stores 53,990 52,563 2.7%

– Home Furnishing Stores 46,218 42,415 9.0%

– Household Appliance Stores 13,706 12,359 10.9%

– Radio,TV and Other Electronics Stores 52,335 49,975 4.7%

– Computer and Software Stores 26,426 24,950 5.9%

Sporting Goods, Hobby, Book and Music Stores 81,520 82,004 -0.6%

– Sporting Goods Stores 27,792 27,988 -0.7%

– Book Stores 16,180 15,799 2.4%

Nonstore Retailers 194,026 180,805 7.3%

Food Services and Drinking Places 358,726 334,605 7.2%Sour

ce:U

S Ce

nsus

Bur

eau

13

Commercial investment activity remained strong during2003, despite rather weak real estate market fundamentals.Although vacancy rates and rental rates were down formost property types, strong demand and low interestrates created a seller’s market. Fueled by low interestrates, an abundant flow of capital and frenzied demandfrom a variety of buyer types, cap rates trended downward50 to 75 basis points for most property types during2003. We do not predict that these market conditions,which are incredibly seller friendly, can be sustainedthrough 2004. Cap rate compression will not continuein the coming year; however, demand for most producttypes will remain brisk during 2004.

We believe that commercial real estate market fundamentalswill improve in 2004. The U.S. economy is showing signs ofa modest recovery and the equity markets have improvedsignificantly over the past six months. However, theimproving equity markets will serve to stabilize real estateinvestment performance in 2004. With the stock marketimprovements in 2003, less money will likely flow into realestate in 2004. Investment grade real estate will remainin strong demand during 2004, but will not enjoy significantincreases in valuation as cap rates are expected to remainstable and may even trend upward over the next year.

Over the next 12 months, debt capital for commercialreal estate should remain cheap and readily available. In fact,during 2003, almost $80 billion in new CMBS were issuedin the U.S. (a domestic record). All indications are thatthe Federal Reserve will not increase short-term interestrates until the economy starts creating jobs at a faster pace.With 2004 being an election year, economic policy shouldremain very stimulative. Thus, capital is expected to bereadily available throughout the year, with some lendersand investors looking at hard-hit sectors such as hospitalityfor improved margins and returns. This low interest rateenvironment will continue to keep cap rates low.Although 2004 will continue to be an active market,buyers will likely become more selective and cautiouswith their underwriting criteria.

InvestmentMarket Overview

INV

ESTM

ENT

10.00

9.75

9.50

9.25

9.00

8.75

8.50

8.25

8.00

7.75

7.50

Capi

taliz

atio

n Ra

tes

(%)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2001 2002 2003

Multi-Family Industrial Office-CBD

Office-Sub Retail

Cap Rate Trends

Source: RERC

15

Specific Trends by Property Type Include

MULTI-FAMILY

Investor demand for apartment properties remainedstrong during 2003, despite troubling conditions insome markets. Cap rates for Class A propertieswere in the 7.5-8.25% range in 2003. With lowinterest rates drawing apartment renters into homeownership renter demand was adversely affected.Last year was the third straight year of weakenedrenter demand for apartments. In fact, the nationalapartment market vacancy rate is higher than it hasbeen for more than a decade. However, long-termdemographic trends such as the echo-boom should prove favorable to this sector during thecoming decade.

Nonetheless, apartments have been providing predictable returns to investors for decades andhave historically been a favorite investment type.Markets with supply constraints and comparativelyexpensive housing will continue to be choice

locations for apartment investors. Examples ofthese types of markets include Seattle, Boston,Washington D.C., New York, San Francisco, andMiami. Redevelopment opportunities and conversionsinto condos should remain fertile investments.

As the chart on the following page illustrates, caprates for apartment properties trended downwardsignificantly in 2003. Although market fundamentalsdeteriorated in 2003, the overall dollar volume forthis segment was up from 2002. An improvingeconomy that creates jobs and rising interest ratesthat make home ownership more costly wouldboth help to increase demand from renters andwould bring more investors back into this segment.With current construction activity, the availablesupply will far exceed demand in 2004. Overall, theapartment market performance will lag behindother market segments over the coming year.

INDUSTRIAL

Investor demand for leased industrial propertieswas incredibly strong in 2003, with cap rates formost Class A properties in the 7.5-8.75% range.However, tenant demand for warehouse propertieshas trended downward during the past three years.Nonetheless, new construction has continued.Investors and developers have now realized thatthis market segment is out of balance and haveslowed new construction activity. Although vacanciesincreased and rents decreased in 2003, cap ratesfor industrial properties trended downward. As withother markets, strong demand backed by low

interest rates and an abundant supply of capitalserved to create a seller’s market (particularly for investments with long-term leases).

Markets offering the best investment opportunitiesare the so-called “gateway” markets- includingChicago, Los Angeles and north New Jersey.These markets all have significant internationaltrade components and good transportation infrastructure. Other markets such as Miami and Seattle should also fair well with improvinginternational trade conditions.

OFFICE

The office market has undoubtedly been mostimpacted by the recent economic downturn. Over ahalf million office jobs have been lost since 2001.Cap rates for CBD properties are generally in the8.5-9.0% range, while suburban properties are inthe 9.0-9.5% range. Nationally, rents have fallen 20-25% since 2001 and vacancy rates have increased.However, office vacancy rates appear to have bottomed during mid-2003. In fact, net officeabsorption was positive during the second half of 2003. However, office market rebounds havehistorically lagged economic recoveries by at least 12months. Additionally, many corporations currently

have excess “shadow” space that will allow forgrowth without requiring additional occupancy.Investment returns in the office sector may belargely dependent upon the velocity of job growth.With an improving economy and job growth, theoffice market sector is poised for a modest recoveryover the next 1-3 years. If the “jobless” recoverycontinues over the next few years, this sector willface significant challenges.

History has shown that the bottom of the officemarket cycle has proven to be a good time to buy office properties. However, prices for office

INV

ESTM

ENT

16

Advice for Investors

RETAIL

• Apartments should be purchased very selectively.Look for markets with high housing costs and barriers to entry.

• Avoid investing in special purpose industrial properties and properties with small yard areas.

• Gateway market industrial properties shouldprove to be good long-term investments, offering upside potential.

• Industrial investors should focus on income and not growth in value. Short warehouse construction lead times will continue to limitpotential gains in value.

• Look for well-positioned office properties in historically strong job growth markets offeringupside potential for leasing risks.

• Buy properties with short-terms leases and pendingrollovers based on current rents, not contract rents.

• Be watchful of neighborhood shopping centerswith a weak grocery anchor. Concentrate oncenters with the number one or two grocer in the marketplace.

• Maximize leverage to enhance equity returns,utilizing long-term debt structuring.

• Look to re-position failing retail centers withstrong demographic characteristics into upscalelifestyle centers.

Ron Sparks, MAI Colliers Valuation and Advisory Services

properties with strong occupancy rates have trendedupward in recent years. As shown by the chart on this page, cap rates for both CBD and suburbanoffice properties decreased 50 to 75 basis points in2003. We could start to see some distressed sellingin this sector over the coming year, particularly byhighly leveraged investors. The high cost of re-leasing

office space (commissions and build-out) also serveto add additional risk to this sector. Risk adverseinvestors willing to assume lease-up risks during an improving economy could be well rewarded ifthere is significant job creation over the next 1-3years. Overall, the office market is expected tomoderately improve over the next few years.

The fundamentals of the retail market remainedstrong in 2003 and should continue throughout2004. Cap rates for most Class A retail centersare in the range of 8.25-8.75%. Unlike the othermajor property types, the retail market has experienced positive absorption in every quarterduring the past three years. Consumer spendinghas remained strong throughout the economicrecession. Low interest rates and the resultinghome refinancing boom has allowed many consumersto pull equity out of their homes and to purchasea variety of consumer goods. Federal tax cuts havealso put additional buying power in the hands ofconsumers. The retail sector has become somewhatoverheated and overpriced during the past fewyears and some contraction appears imminent, asreturns do not warrant the risk for many retailsectors like neighborhood shopping centers with

mediocre grocery anchors. The retail sector isalways in a state of flux.

The ever-growing preference for discount goodshas had a profound affect with general merchandiseand food retailers. Wal-Mart is simultaneouslythreatening both grocers and conventional department stores alike. Unlike 10 years ago, mostgeneral merchandise goods are now purchasedthrough a discount retailer (Wal-Mart,Target,Costco, etc.). Traditional department stores continue to lose sales to discounters. Wal-Mart isalso the largest grocer in the U.S. and continues toerode market share from other grocers. As weakergrocers continue to close, struggle to compete,or are acquired, caution should be utilized whenpurchasing neighborhood shopping centers.In today’s retail environment,Wal-Mart is the preferred anchor for shopping centers.

INV

ESTM

ENT

17

Despite a slight slowdown in the fourth quarter, the Atlantaoffice market finished 2003 on a much stronger note than2002. As of the close of the year vacancy stood at 17.8%,remaining stable with the 17.7% rate that was recorded inthe third quarter. Despite negative net absorption of over250,000 square feet during the final three months of theyear,Atlanta still ended 2003 in the black. Nearly 300,000square feet of positive absorption was recorded for theyear as a whole, marking the first positive yearly absorptionthat the market has recorded since 2000. Attractive landlord incentives have played a role in this, particularly for Class A space which recorded positive net absorptionin the fourth quarter. The Downtown and Midtown submarkets are also proving to be very attractive to tenants with the live/work/play community lifestyle drivingheightened tenant interest. The progress made throughout2003 has bolstered confidence and proven that the metropolitan area has made it through the worst.

The outlook for the Atlanta office market in 2004 is muchmore optimistic than the last few years. Still we look forgrowth to occur at a much slower rate than normal.The good thing is that activity and interest has started gaining momentum. We expect vacancy to continue to stabilize in 2004 and to show declines later in the year.The key factor to this will be continued overall economicgrowth and the positive impact that this will have on overall demand. While over 1.7 million square feet of newoffice space is currently under construction, the fact that asignificant amount of this space already has commitments in place bodes well for the market. With speculative development at a minimum, the market will have more timeto absorb currently available space. Given that activity hasalready started to pick up, look for Atlanta’s office market tobegin to move back towards equilibrium throughout 2004.

Inventory New Absorption Vacancy Warehouse (SF) Supply (SF) (SF) Rate (%) Rent ($PSF)

1999 454,160,555 16,353,679.00 16,419,885 8.4 3.752000 469,473,117 15,312,562 13,451,118 8.3 3.202001 487,468,688 17,995,571 1,362,841 11.7 3.602002 494,883,000 7,414,312 -3,546,999 13.9 3.302003 498,142,000 3,259,000 -1,158,000 14.3 3.50

Mike Spears, SIOR

Two Midtown Plaza1349 West Peachtree Street, NE, Suite 1100Atlanta, GA 30309-2956Tel 404-888-9000Fax 404-870-2845

Inventory New Absorption Vacancy Class A(SF) Supply (SF) (SF) Rate (%) Rent ($PSF)

1999 46,928,000 295,000 -224,000 7.7 22.202000 47,578,000 650,000 1,434,000 6.0 24.202001 50,359,000 2,781,000 -367,000 11.9 24.902002 51,583,000 1,224,000 781,000 13.6 23.502003 52,071,000 488,000 240,000 13.9 22.20

ATLA

NTA

,GA

Downtown Office


1999 130,278,000 9,707,000 7,792,000 11.3 23.002000 138,523,000 8,245,000 7,388,000 11.2 23.302001 146,047,000 7,524,000 187,000 15.6 23.802002 149,949,000 3,902,000 -5,991,000 18.2 22.402003 151,987,000 2,038,000 57,000 19.2 21.50

Suburban Office

Industrial

Office IndustrialThe Metro Atlanta industrial market finished 2003 on a positive note. Net absorption for fourth quarter topped1.4 million square feet, the first positive absorption that the market has recorded since third quarter 2002.Leasing activity as a whole increased by over 2.2 millionsquare feet over the final three months of the year, withbulk warehouse deals leading the way. The South Atlantasubmarket was the focus of most of this activity, withOzark Automotive, DSC Logistics and UPS Supply ChainSolutions each inking deals of over 200,000 square feet during the final quarter of 2003. The immediate availabilityof large blocks of space in this market helped to drive thissurge of activity as space users sought to take advantage of favorable tenant conditions while they still could.

The resurgence of the overall economy is finally taking holdin Hotlanta with activity finally picking up at the close ofwhat had been a lackluster year. It is expected that the first half of 2004 will see a continuation of this trend,with increased leasing activity and continued positive netabsorption gradually swinging the pendulum back into landlords’ corner. Until now, however, most leasing activityhas focused on larger bulk deals, with smaller 10,000-20,000square foot deals remaining difficult to come by. The fullmeasure of local recovery will be the point at which thesedeals return to the market. Nonetheless, the attituderemains optimistic and it is expected that positive absorptionwill continue throughout the year with smaller lease transactions finally taking center stage by year’s end.

19

AU

STIN

,TX

The Austin office market ended 2003 much as it began…with landlords continuing to battle for scarce tenants.While sublease space has fallen over 50% since year-end2002, there remains almost 8.5 million square feet of officespace available citywide and rental rates continued to fall,proving Austin to still be a tenant's market. As of the closeof the year, overall average full service rental rates haddropped to roughly $18.00 per square foot, or just over11% from where they stood at the close of 2002.However, while there remains some downward pressure on lease rates, they do appear to be stabilizing. Meanwhile,vacancy remains entrenched at 23.3%, almost half of whichis attributed to the CBD’s current vacancy of 22.1%.The news is not particularly encouraging for the CBD asthis rate is expected to increase in the first quarter withthe delivery of the 525,000 square feet Frost Bank Tower.Though this building is 60% pre-leased, there remains over200,000 square feet of space to be filled.

However, the news is not all bleak. While it is not exactlyclear if the market has hit bottom yet, it is clear that Austincontinues to be a great place to be a tenant. Flight to quality is driving much leasing activity as tenants in themarket continue to seek upgrades from Class B or C spaceto competitively priced Class A locations. Meanwhile, whilejob growth has not yet returned, space users are beginningto talk about expansion again and the health of Austin’stech sector is gradually returning. While we expect a slowrecovery throughout the next 18 months,Austin’s talentpool and highly educated workforce remain huge draws.The nationally recognized magazine Plants, Sites & Parksranking Austin in the top ten in their list of the best metroareas in the U.S. for corporate moves in 2004. This list iscompiled by asking relocation experts of all industrieswhere they are most likely to put their next office basedon general costs, quality and availability of workforce, taxes,cooperation from community and state governments, andaccess to transportation. Also adding to Austin's appeal,Forbes ranked Austin #1 in Places for Business and Careers.

Rick Whiteley

The Terrace II, Suite 100 2700 Via FortunaAustin,TX 78746Tel 512-474-2400Fax 512-477-3037


1999 6,916,000 146,000 46,000 4.5 28.302000 6,916,000 0 79,000 3.0 38.102001 7,242,000 326,000 -572,000 13.8 30.402002 7,944,000 702,000 154,000 21.2 24.402003 7,880,000 -64,000 -120,000 22.1 23.00

Downtown Office


1999 17,836,000 2,513,000 -351,000 8.2 N/A2000 18,936,000 1,100,000 1,715,000 4.7 N/A2001 21,954,000 3,018,000 -571,000 20.4 25.002002 28,196,000 6,242,000 -245,000 23.5 20.802003 28,498,000 302,000 212,000 23.6 17.90

Suburban Office

Office20

The Bakersfield Office Market ended 2003 on an upbeatnote. Even though there was some negative absorption in the downtown market in the fourth quarter, the year still ended with positive absorption. The downtown market consistently maintained a 3-4% vacancy ratethroughout 2003 and it is expected this submarket willremain unchanged over the next quarter. With no new construction planned or under way rents should remain unchanged.

One of Bakersfield’s strongest performing suburban submarkets has been the Southwest market. This tradearea recorded total absorption of over 300,000 square feetfor the year and currently has a vacancy rate of 9.4%, downfrom 13.9% in December of 2002. The sublet vacancy thatwas left behind in the aftermath of the oil company exodushas virtually disappeared and this market currently boastsits lowest vacancy rate in five years. The Southwest submarket should continue this trend over the next quarter as the construction projects started in late 2003 are finished and added to the inventory. Rents areexpected to remain steady. Look for the overall market to strengthen in 2004 as overall economic fundamentalscontinue to translate into increased user demand.


1999 21,515,000 300,000 722,400 3.0 3.002000 21,955,000 440,000 800,000 2.7 3.102001 23,271,000 1,316,000 1,243,000 3.5 3.202002 25,764,000 2,493,000 1,576,000 4.9 3.202003 26,021,000 257,000 -263,000 7.0 3.20

David A.Williams, SIOR

10000 Stockdale Highway, Suite 102Bakersfield, CA 93311Tel 661-631-3800Fax 661-631-3829


1999 2,421,000 N/A N/A N/A 21.002000 2,521,000 100,000 94,000 5.8 16.202001 2,589,000 68,000 119,000 5.5 16.202002 2,623,000 34,000 73,000 4.0 17.402003 2,623,000 0 14,000 3.2 17.40

BA

KER

SFIELD,C

A

Downtown Office


1999 4,327,000 N/A N/A N/A 21.002000 4,387,000 60,000 122,000 16.3 18.602001 4,387,000 0 125,000 13.5 19.202002 4,533,000 146,000 106,000 14.0 18.602003 4,630,000 97,000 307,000 9.4 19.80

Suburban Office

Industrial

Office IndustrialIn 2003 demand for industrial space greater than 50,000square feet was slow. However, we did see the completionof the 1.7 million square foot Target distribution center inShafter and the second 900,000 square foot phase of theIKEA distribution center in Tejon Ranch. In 2002, Daiseytekwas one of our shining stars, leasing 350,000 square feet inthe Tejon Industrial Center. Unfortunately, its bankruptcybrought the space back on the market in 2003 contributingto the negative absorption for the year. The vacancy rateincreased this year from 6% to 7%. However, we still have a limited supply on the smaller end of the market. Due tothis limited supply, we experienced a drastic increase in land sales, which is starting to push new construction.Bakersfield’s low cost of living, low land cost, available labor,and central California location continued to lure businessesto town.

Geared for distribution use and featuring 100,000 squarefeet or more with plentiful loading docks and clear heightsof up to 30’ or more, bulk warehouse space had dominatedindustrial development and activity in the Bakersfield market over the past few years. This should come as little surprise since Bakersfield’s proximity to the state’spopulation centers, access to transportation networks and relatively cheap land make it an ideal distribution hub.However, there is currently an overabundance of this typeof space while a shortage exists for industrial structures ofless than 50,000 square feet. Some developers have begunto respond to this shortage. Although Tejon IndustrialCenter currently has one vacant 650,000 square foot bulk building, they have plans to build some 20,000-100,000square feet of speculative product geared to meet thisdemand. In the immediate future look for the market to continue to struggle with the limited supply of smallerindustrial buildings as speculative and owner-built newdevelopment works its way through the constructionpipeline. As the overall economy brightens demand foraverage-size space will continue to pick up and inquiries for larger space should increase going into 2004.

21

BA

LTIM

OR

E,MD

The Baltimore Metropolitan Area office market sharplyrebounded in 2003, absorbing 1.4 million square feet ofspace, dropping the vacancy rate to 16.8% from the 18.1%mark recorded one year ago. Nowhere was this more evident than in Howard County, which had more absorptionthan any other submarket in Baltimore. The BWI Airportmarket again had the lowest vacancy rate in the metropolitanarea, because of the strong demand by the defense andHomeland Security sector which has buffered the Baltimoreeconomy during the national economic slowdown.Activity in Baltimore County remained strongest inSuburban West where insurance and processing operationscontinued to relocate and expand. The Baltimore CountyNorth market continued to struggle as net absorption was less than the 75,000 square feet of new construction.The Downtown market lowered its vacancy rate to 18.4%on the strength of 295,000 square feet of absorption.The small Annapolis market had an up-tick in its vacancyrate as it added almost twice as much space as it absorbed.

Overall, 2003 was an encouraging year. The marketabsorbed the most space since 2000, with absorptionexceeding the amount of new construction for the firsttime since 1998. Completed construction fell below 2 million square feet for the first time in four years.The outlook is positive both from an economic and market fundamentals standpoint. While job growth is downin some key sectors over the past 12 months, it is up .6%overall. Employment growth has been particularly solid inProfessional & Business Services (1.8%), and Educationaland Health Services (2.8%), two of Baltimore’s largeremployment sectors. With business investment finally taking some of the growth load off the consumers’ shoulders, the forecast is for stronger economic growth both nationally and regionally.


1999 75,239,000 2,529,000 2,608,000 11.6 4.752000 76,540,000 1,301,000 3,616,000 7.7 4.702001 80,441,000 3,901,000 917,000 13.3 4.502002 81,748,000 1,307,000 -322,000 16.8 5.002003 84,080,000 2,332,000 2,250,000 17.0 5.60

Michael A. Elardo

100 Light Street, Suite 1400Baltimore, MD 21202-1116Tel 410-752-4285Fax 410-576-9031


1999 12,939,000 161,000 593,000 9.2 25.002000 13,163,000 224,000 171,000 9.3 26.502001 13,771,000 608,000 299,000 11.4 24.102002 15,461,000 1,690,000 33,000 19.6 21.402003 15,626,000 165,000 296,000 18.4 24.30

Downtown Office


1999 29,686,000 1,856,000 1,400,000 8.4 23.502000 32,132,000 2,446,000 1,913,000 9.9 23.702001 34,340,000 2,208,000 418,000 14.6 22.502002 35,341,000 1,001,000 14,000 17.4 18.402003 35,990,000 649,000 1,114,000 16.0 21.30

Suburban Office

Industrial

Office IndustrialThroughout 2003, the Baltimore industrial market absorbedabout as much space as it added—roughly 2.3 millionsquare feet of bulk distribution, flex and office/warehousespace. While this would seem to paint a picture of a marketin perfect equilibrium, it is vital to note that the Baltimoremarket’s performance was sharply demarcated by productand location throughout this time. Over two million squarefeet of the new space added was bulk distribution space.Meanwhile, 80% of this past year’s absorption and 25% ofall new development occurred in the Baltimore WashingtonCorridor. While the Baltimore Washington Corridor hasbecome the pre-eminent industrial market within the metropolitan area, it has come at a cost to some ofBaltimore’s other suburban submarkets. GE moved into itsnew 1-million-square-foot distribution center in Cecil County,relocating from Harford County. This, plus the departuresof large tenants Telcobuy.com, SuperValu and Pier One morethan doubled the amount of vacant bulk distribution spacein Harford County from a year ago, pushing its vacancy rateto 29%. The East market fared better, absorbing almost600,000 square feet, the second highest in Baltimore thisyear. Leasing activity was subdued everywhere else.The overall vacancy rate for bulk distribution spaceremained high, 18.2%, as new construction off-set the strongabsorption. Clearly some markets and property types continue to shine while others still face significant challenges.

Looking ahead to 2004, the outlook for Baltimore’s industrial market is good. Overall economic fundamentalscontinued to improve throughout the final half of 2003 and new construction remains subdued. Favorable interestrates, strong GDP growth, increased outlays for equipmentand capital expenditures, inventory replenishment, andincreasing factory production cumulatively provide a tailwind going into 2004. The full effect of tax cuts and favorable depreciation allowances should also help spur further demand and leasing activity through the year.Look for vacancy rates to fall as elevated demand for more service and distribution space kicks in.

22

Demand for commercial office space is directly linked to the curve in employment and job growth; hence,absorption trends follow accordingly. As the labor market has experienced significant corporate layoffs andrestructuring over the past two years, we have seen anincrease in supply of available office space in the market.This excess supply, combined with a very competitive sublease market, has resulted in a reduction in transactionvolume, longer lease-up times, rent concessions, and lowerlease rates. These factors, together with continued speculative construction, led to an overall office vacancyrate that fluctuated between 14% and 16%, including bothdirect and sublease space available. Despite these trends,the Boise market remained quite healthy, compared toother western real estate markets.

The delivery of a number of significant new office developments will likely contribute to a higher vacancy rate in the first half of 2004. These projects, however,are experiencing strong interest by tenants and should continue to demonstrate steady leasing activity as the market expands. The completion of three major officeparks will add 2.5 million square feet of commercial spaceover the next several years. While office market showedsigns of life in 2003, feelings of euphoria were held in checkas developers, owners, and lenders remained cautious intheir approach to speculative construction in the office sector. This “wait-and-see” approach should continue in2004 while slowly giving way to confidence derived from an increasing volume of transactions and growth in theTreasure Valley.


1999 27,872,000 396,000 345,000 2.3 4.902000 29,233,000 1,361,000 1,558,000 1.5 5.002001 N/A N/A N/A N/A N/A2002 N/A N/A N/A N/A N/A2003 22,023,000 87,000 154,000 10.1 4.40

George S. Iliff

475 S. Capitol Blvd., Suite 300 (P.O. Box 7248, 83707-1248)Boise, ID 83702Tel 208-345-9000Fax 208-343-3124


1999 1,935,000 242,000 181,000 8.9 19.002000 1,975,000 40,000 17,000 9.1 18.802001 N/A N/A N/A N/A N/A2002 2,728,000 N/A N/A N/A N/A2003 2,803,000 75,000 -4,000 10.6 18.90

BOISE,ID

Downtown Office


1999 4,833,000 331,000 244,000 15.3 17.002000 5,034,000 201,000 234,000 12.6 17.002001 N/A N/A N/A N/A N/A2002 N/A N/A N/A N/A N/A2003 7,213,000 442,000 323,000 15.6 16.60

Suburban Office

Industrial

Office IndustrialThe present condition of the Treasure Valley industrial realestate market remains relatively unchanged since mid-year2003. At that time, a struggling economy, overseas tensionsand the decline of consumer confidence had resulted inmarket conditions that could be defined as sluggish at best.Leaner company payrolls and rising unemployment ratesresulted in a slowdown in business expansions and/or relocations. Unfortunately, conditions have changed little in Boise over the past six months. Despite the fact that theoverall economy recorded strong growth through the finalhalf of 2003 this has yet to translate into any significantspike in demand in the Boise industrial market.

This has made for very favorable conditions for tenants,with most current transaction activity centered around tenants relocating from one building to another and makingthe most of their bargaining position.

In addition, the availability of sublease space is greater,creating added opportunities for those tenants in the market. Accordingly, we are seeing an increase in landlordconcessions such as free rent, higher tenant improvementallowances and more flexible rental schedules. The declinein interest rates over the last year has also resulted in anincrease in users considering owning their facilities, asopposed to leasing them, primarily amongst the smallerusers in the 3,000 to 5,000 square foot range. The goodnews is that developers have shied away from most newconstruction. This will bode well for the market as overalleconomic conditions improve and demand begins to pick up.

23

BOSTO

N,M

A

The downtown Boston office market finally showed somesigns of life during the second half of 2003, recording 1.4million square feet of positive net absorption. These gainsbrought net absorption for the year to positive levels aftertwo consecutive years of declining occupancy. Asking rentsbegan to level off during the second half of the year, after a40% decline from the peak of the market at the end of2000. Direct asking rents for Downtown space range from$24 - $50 per square foot and are currently equal to 1998levels. Meanwhile, the completion of the One LincolnStreet tower during the third quarter marked the largestBoston development since 1987.A total of 1.6 millionsquare feet of new development remains underway, withonly 55% currently pre-leased. As a result, additional newconstruction is unlikely to commence without significantcommitments already in place.

The suburban Boston office market began to show sings of stabilizing during the second half of 2003. Cambridgeposted positive net absorption for the year, fueled by severallarge build-to-suit developments and some in-migrationfrom traditional office tenants. While the suburban marketrecorded negative net absorption for the year as a whole,it did register significant positive net absorption late in theyear. Fortunately, the development spigot is finally closed,and we will not see any speculative construction in thesuburbs for several years. We anticipate substantial leasesfrom a variety of industries in early 2004, as tenants lookto upgrade space. Unfortunately, the reality of 26.3 millionsquare feet of available suburban space at year-end presentsquite a challenge. Furthermore, companies may not beusing 5% to 10% of their leased space that they can refillwhen hiring resumes. As long as local job creation lags, itwill take time before significant positive absorption beginsto occur again. As a result, expect the current highly competitive rental environment to continue into 2004.


1999 51,739,100 794,800 2,170,200 9.7 6.002000 54,174,000 2,434,900 3,030,400 8.2 7.002001 56,235,800 2,061,800 -1,726,200 14.6 7.002002 57,094,000 858,200 -59,700 15.9 6.002003 57,851,000 757,000 -1,247,800 19.2 6.00

David Slye

255 State StreetBoston, MA 02109Tel 617-523-8000Fax 617-531-4280


1999 50,040,000 844,000 812,000 5.5 50.502000 51,890,000 1,850,000 2,290,000 4.5 72.002001 54,064,000 2,174,000 -1,935,000 11.9 55.302002 55,796,000 1,732,000 -860,000 16.2 43.702003 57,050,000 1,254,000 368,000 17.4 38.40

Downtown Office


1999 75,700,000 5,599,000 7,904,000 12.3 25.602000 80,653,000 4,953,000 9,241,000 6.2 38.902001 87,486,000 6,833,000 -6,570,000 21.0 31.002002 90,936,000 3,450,000 -1,766,000 26.0 25.002003 93,320,000 2,384,000 -290,000 28.2 21.00

Suburban Office

Industrial

Office IndustrialAfter industrial occupancy held steady in 2002 andimproved in the first quarter of 2003, demand fell sharplyduring the last three quarters and the year ended with negative 1.2 million square feet of net absorption. Severalsizeable availabilities surfaced throughout the suburbs,especially in the Southern submarkets. Most industrialtransactions in 2003 were relocations or downsizing withoccupancy losses in one building or submarket offsettinggains in another.Tenant requirements remained relativelyconstant in 2003, and at year-end, retail and restaurantwarehouse-distribution needs dominated the activedemand. Availability increased to 19.2% during 2003, aturnaround from the promising downward trend throughout2002 and early in 2003.There was the expectation thatadditional large blocks of space would become availableduring the year and, indeed, many large and mid-sized companies vacated facilities throughout the suburbs.Total available space climbed by two million square feetduring the year to 11.1 million square feet. Warehouserents are in the $4.25 to $6.00 per square foot NNNrange, with manufacturing space in the $6.00 to $7.50 persquare foot NNN range in quality buildings in good locations.

Unfortunately, despite some positive cyclical trends, there isno indication that sustained improvement in demand is justaround the corner.The structural movement away fromtraditional manufacturing for our regional economy willcontinue, and most economists hope for a stable industrialjob outlook at best.A few large warehouse-distributionrequirements, such as BJ’s Wholesale Club and DunkinDonuts, will hopefully land in 2004 and boost absorption,but a return to equilibrium will take time.Available spaceoutweighs current industrial requirements by slightly morethan a four-to-one ratio, and activity remains sluggish allalong the product spectrum, even in some high quality,well-located buildings. Older facilities and large spaces withsubdivision challenges will struggle, and we expect averageasking rents to drift slightly lower in early 2004.

24

As of the close of the year, suburban vacancy for the GreaterCharleston office market stood at 20.5%. This marks a significant increase from the 18.8% mark recorded at theclose of the third quarter. Meanwhile, Downtown vacancydecreased slightly from 14.0% in October to 13.7% as ofthe close of the year. The market continues to face somechallenges, although it appears that it may finally have hitbottom. The good news is that 70,000 square feet of occupancy growth was recorded during the fourth quarter.While this may not seem like much, it was positive growthand is indicative of the fact that tenants are beginning toreturn to the marketplace. We are seeing more spacerequirements in the deal pipeline and the hope is that these will begin to translate into deals over the first half of the year.

Nearly 200,000 square feet of new space came online inCharleston over the final three months of the year, clearlyoutpacing demand as measured by positive net absorption.Growth in the Greater Charleston Office Market occurredthrough a combination of new speculative development,corporate built-to-suit activity and adaptive re-use of olderfacilities. Although the overall vacancy increased throughoutthe course of 2003, rental rates have stabilized and haveactually begun to rise in some submarkets. New developmentwill be the wildcard going forward that will determine thepace of Charleston’s recovery as demand returns to themarketplace, as well as the strength of rental rates in thenear future.


1999 14,010,000 450,000 917,000 20.4 3.002000 14,423,000 413,000 948,000 19.1 3.302001 15,123,000 700,000 442,000 21.0 3.302002 15,723,000 600,000 545,000 21.0 3.352003 16,523,000 800,000 1,446,618 18.5 3.40

Woody Moore, CCIM

151 Meeting Street, Suite 350 (P.O. Box 610)Charleston, SC 29401 (29402)Tel 843-723-1202Fax 843-577-3837


1999 N/A N/A N/A N/A 21.752000 N/A N/A N/A N/A N/A2001 1,734,000 N/A N/A N/A N/A2002 1,764,000 30,000 17,000 10.3 24.402003 1,890,000 126,000 62,000 13.3 20.00

CH

AR

LESTON

,SC

Downtown Office


1999 N/A N/A N/A N/A 19.502000 N/A N/A N/A N/A N/A2001 4,688,000 N/A N/A N/A N/A2002 4,908,000 220,000 64,000 16.1 18.702003 5,539,000 631,000 8,000 20.5 19.30

Suburban Office

Industrial

Office IndustrialThe Charleston Industrial Market, made up of Charleston,Dorchester and Berkeley counties, contains approximately22 million square feet of manufacturing, warehouse,distribution, flex and research and development space.Though the current overall vacancy rate is 16%, the markethas enjoyed steady positive absorption during the course of2003. With few new developments in the market, vacancyand rental rates have stabilized and are beginning to firmup. While many small companies have taken advantage oflow interest rates and moved from leased space into realestate they now own, others have taken advantage of therelative high vacancy in the market and expanded at competitive lease rates. Much of the overall absorption has occurred in the newer projects in market, but continued growth and limited product will help older more antiquated facilities lease.

Several factors are driving the improvement in the industrialmarket, though specifically each one has more of a directimpact on one particular product size. The driving force for bulk warehouse space is port related traffic.The Port ofCharleston holds the distinction of being the fourth busiestcontainer port in the United States and second on the eastcoast behind the Port of New York / New Jersey. With theshipment of containerized cargo up 11% from 2002 andbreak-bulk cargo on the rise, the Port of Charleston is making plans for a 250-acre expansion terminal.The increased traffic will necessitate expansions for distributors and warehousers, particularly third party logistics providers.With companies constantly trying toreduce cost this industry has been very successful in helping companies reduce the cost of operating their distribution supply lines. At present, alternatives for bulkspace in excess of 100,000 square feet are limited andunlikely to increase until some of the existing facilities areleased. Rental rates for bulk space average $3.55 per squarefoot triple net, with operating pass-throughs ranging from$.40 to $.65 per square foot.

25

CH

AR

LOT

TE,N

C

Statistically, the downtown market is in good shape withjust under 10% vacancy and virtually no prospects for newconstruction. However, demand remains dreadfully low.Consequently, competition is fierce among landlords for tenants with shrinking asking rates and increased concessions par for the course.

Meanwhile, the best description for conditions in the suburban markets is “The Good,The Bad and The Ugly.”The Ballantyne, NC-51, Midtown and SouthPark submarkets are all seeing relatively strong leasing activity.However, Ballantyne's absorption will be offset by continuednew development in that area, so don't expect significantdecreases in the vacancy rate. The rest of the markets are either “Bad” or “Ugly” due to the lackluster demand.However, we are seeing some glimmers from the end of the tunnel.

Look for the market to begin to register some positiveoccupancy growth in 2004, with a number of plannedmoves that should bring some relief to beleaguered landlords. General Dynamics has announced that a division headquarters will move to Charlotte and WellsFargo is doubling its customer service center in Fort Mill.Meanwhile, we continue to see growth of smaller entrepreneurial tenants, professional firms and creativefirms at the other end of the spectrum. Still, at least forthe short term look for Charlotte to remain a tenant’smarket. Until the overall economic rebound translates into significant local job growth landlords will continue to face some challenges. That being said, bargain huntersshould also take note that it is unlikely that today’s deeplydiscounted asking rates can go down very much further,if at all.


1999 30,886,000 1,959,000 2,044,000 13.0 4.302000 32,236,000 1,350,000 1,712,000 9.7 3.802001 33,040,000 804,000 -644,000 14.4 3.602002 34,243,000 1,203,000 -486,000 17.2 3.402003 34,417,000 174,000 76,000 18.2 3.40

Robert A. Cochran

330 S.Tryon Street, Suite 301Charlotte, NC 28202-1916Tel 704-375-7771Fax 704-347-0793


1999 11,775,000 1,145,000 938,000 5.1 28.002000 12,527,000 752,000 947,000 3.2 25.302001 13,194,000 667,000 126,000 5.4 24.502002 14,192,000 998,000 364,000 9.5 22.902003 14,292,000 100,000 -7,000 10.2 23.80

Downtown Office


1999 20,203,000 420,000 1,558,000 13.0 24.002000 21,340,000 1,137,000 1,423,000 11.8 21.802001 23,193,000 1,853,000 215,000 17.8 20.302002 24,050,000 857,000 98,000 19.8 20.002003 24,442,000 392,000 539,000 18.9 19.30

Suburban Office

Industrial

Office IndustrialFollowing the last couple of years of lackluster performance,the Charlotte industrial market is poised for recovery in2004. While there have been continued layoffs in theCharlotte manufacturing sector, this trend has reached bottom and we are starting to see assembly and light manufacturing jobs enter back into the market.Meanwhile, Charlotte remains a viable location for relocation and business growth. With its two major highways, rail providers and abundant trucking companies,Charlotte has remained a very attractive transportationand distribution hub.

Look for both warehouse and flex space vacancy to experience a steady decline throughout 2004. The influx ofa number of substantial new users to the market will resultin occupancy growth, while construction activity continuesto occur at levels significantly reduced from previous years.All of these factors should play a role as the market movesback towards an equilibrium between supply and demand.Meanwhile, expect rental rates to remain relatively stablefor both warehouse and flex space. We expect leasingvelocity to increase as the year progresses, with renewedinterest in new speculative development taking place as the market continues to gather steam.

26

While law firms dominated the top spot of tenants completingtransactions in Chicago's CBD throughout 2003, there wasother activity in the market. While the significant transactionswere a result of tenants relocating to newly developedbuildings offering greater efficiencies and enhanced technological features, the trend that dominated most ofthe transactions was the landlord's willingness to restructureleases to stabilize long-term cash flow. Landlords embracedthis for one of two reasons. First, many owners were tryingto stabilize cash flow to benefit from the aggressive buyingfrenzy which has been taking place. Holders were willingto make aggressive deals by offsetting the lower rent withlower debt cost. Meanwhile, the demand for upgrade spacein the face of aggressive competition for tenants meant thatspace users could take advantage of some excellent deals.

These same trends were present in Chicago's suburbanmarkets, although further exacerbated by the presence ofroughly 3.8 million square feet of sublease space. While theimpact of sublease space is gradually weakening, the addedcompetition gives tenants more options and more leveragein their negotiations. Yet, despite these persistent challengesto landlords, 2003 will likely be remembered as the yearthat the market finally hit bottom. While transaction velocityduring the first half of the year was extremely weak, therewere some encouraging signs as deal activity picked up by thefourth quarter. Chicago's office market is still transitioningtowards recovery. Until job growth is achieved this will bedifficult to accomplish. Additionally, corporate users are alsoreducing their average square foot per employee. The ruleof thumb used to be 250 square feet per person, but now itis in the range of 200 square feet per person. Combined withmany economists predicting fewer jobs in the office sectorand it appears that absorption will continue to be negativein 2004. Notwithstanding the "wait and see" attitude thathas pervaded the last 12 to 18 months could prove costlyfor tenants that wait much longer. Clearly tenants need totake advantage of the market while there is still uncertainty.When the uncertainty is reduced, the aggressive deals landlords are offering will follow.


1999 984,342,000 22,227,000 23,398,000 6.3 5.202000 1,003,485,000 19,143,000 16,117,000 6.6 5.602001 1,013,833,000 10,348,000 -18,986,000 8.1 5.102002 1,027,194,000 13,361,000 1,378,000 8.9 4.402003 1,040,660,000 13,466,000 7,392,000 9.4 4.60

David A. Bercu, SIOR

6250 N River Road, Suite 11-100Rosemont, IL 60018Tel 847-698-8444Fax 847-698-8445


1999 135,555,000 2,600,000 -156,000 10.7 34.302000 136,359,000 804,000 2,140,000 10.2 36.002001 138,590,000 2,231,000 -685,000 17.7 35.002002 139,420,000 830,000 -3,404,000 16.6 32.002003 142,245,000 2,825,000 -945,000 16.9 32.00

CH

ICA

GO

,IL

Downtown Office


1999 131,498,000 1,004,000 462,000 11.7 27.002000 135,498,000 4,000,000 4,496,000 11.4 28.502001 142,825,000 7,327,000 -2,964,000 18.1 29.002002 144,688,000 1,863,000 -4,055,000 19.1 25.002003 145,674,000 986,000 -739,000 19.6 25.00

Suburban Office

Industrial

Office IndustrialThe 2003 Chicago industrial real estate market experienced some striking similarities to the activity in2002 while exhibiting some noteworthy differences as well.Leasing volume in 2003 was 28.1 million square feet, up 4%from 2002’s results. Industrial activity in 2003, as was alsotrue in 2002, was primarily driven by companies in the consumer goods sector. Many large national or regionalcompanies executed strategic initiatives to relocate, update,increase or consolidate major distribution facilities reflectinga trend to more effectively manage the supply chain to distributors and retail stores. The increase in Build-to-Suittransactions reflects this strategy for larger buildings(greater than 400,000 square feet), many with cross-dockfacility and extra land for trailer storage and expansion.

Look for 2004 to begin with a more vigorous economicengine than 2003 and for user confidence to continue to re-emerge. This economic recovery resembles a slowthaw that gains momentum gradually but steadily, ultimatelyaffecting all sectors of local commerce. Additionally, theemployment component of this recovery lags the otherindicators, which may result in a mild versus robust pent up demand for space.

27

CIN

CIN

NAT

I,OH

At first glance, the Cincinnati Office Market appears to be in the same position that it was just 12 months ago.Hope sprung eternal then, as many market players believedthat the worst had passed and positive absorption and rent growth were around the corner. Optimists were disappointed, however, as the office sector continued tosuffer from anemic job growth and additional subleasespace placed on the market. However, as of the close of2003, there are a number of factors that indicate that themarket is entering a transition period, with real stabilizationbeginning to occur in 2004.

Unlike in 2002, overall economic indicators are overwhelmingly positive. Productivity, Gross DomesticProduct, and employment figures are showing improvementsand gaining momentum entering the new year. Hiring activityhas started to increase, although hiring will be limited until companies are more comfortable with the economicrecovery. Helping this process is the fact that the stockmarket indexes have all posted 20% gains in 2003, and corporate profits were also exhibiting solid gains.Most importantly, activity in the Cincinnati office marketshowed a marked increase during the final quarter of 2003.Going forward we expect demand for space to steadilyincrease as job growth begins to return to the market.Limited new development will also help the market regainbalance, although rent growth will likely lag increases inoccupancy thanks to the large amount of available space(including subleases) that remain in the marketplace.Look for the Cincinnati office market to record positiveabsorption and decreasing vacancy in 2004, but little to no effective rent growth prior to 2005.


1999 226,248,000 9,000,000 2,163,000 5.0 4.302000 234,248,000 8,000,000 2,500,000 6.0 3.302001 239,687,000 5,439,000 464,000 7.6 3.202002 241,787,000 2,100,000 1,003,000 9.0 3.202003 242,829,000 1,042,000 -35,000 8.9 3.20

Thomas M. McCormick, SIOR, CCIM

221 East Fourth Street, 27th FloorCincinnati, OH 45202Tel 513-421-4884Fax 513-421-1215


1999 12,935,000 36,000 137,000 7.6 20.602000 12,948,000 13,000 55,000 6.9 20.902001 12,948,000 0 -110,000 8.2 21.302002 13,098,000 150,000 105,000 13.4 21.202003 13,098,000 0 8,000 13.0 21.20

Downtown Office


1999 13,715,000 409,000 361,000 11.6 22.002000 14,699,000 984,000 225,000 12.9 16.302001 15,832,000 1,133,000 735,000 16.4 19.302002 16,475,000 643,000 149,000 20.3 19.702003 16,475,000 0 142,000 22.4 19.80

Suburban Office

Industrial

Office IndustrialAt the close of 2003, the Cincinnati industrial market is stabilizing and preparing for a climb in occupancy, rents andconstruction. Industrial vacancy at year-end 2003 stood at 8.9%. This less than one percent higher than the 8.8%recorded at the close of 2002, but shows a considerableimprovement over the nearly 9.9% mark recorded at mid-year 2003. Bulk warehouse space remains the mostimpacted product type with over nine million square feetcurrently vacant and a vacancy rate of 20.2%. The marketas a whole recorded negative net absorption of roughly100,000 square feet of space despite overall deal volume of approximately 5.5 million square feet. This means thatbusiness consolidations, mergers, branch closures, and corporate relocations have cancelled out most gains inleasing activity. As a result, competition remains strong for tenants with many landlords offering aggressive dealsfeaturing generous incentives such as low rates, reducedlease terms and free rent.

The good news is that throughout 2003, constructiondeclined nearly 50% from 2002 to just 1.1 million squarefeet of new space. With declines in vacancy over the lasthalf of 2003, it appears that the market has already turnedthe corner. Tenants are beginning to return to the marketplace and space requirements that we are currentlytracking could result in positive net absorption of morethan two million square feet through the end of 2004.However, new construction in 2004 will likely exceed 2.5 million square feet, meaning vacancy should stay at ornear current rates. Still, the outlook is generally positivefor Cincinnati industrial market. Look for rents to stabilizeand leasing activity to pick up significantly throughout 2004.

28

Office leasing waned throughout 2003 and the overallvacancy rate in the Cleveland metropolitan area stood at20.7%, nearly three points higher than the national vacancyrate. Activity is expected to increase as the economyimproves in 2004, and landlords are anticipating their negotiating power to improve near the end of the year.However, an abundance of sublease space combined withan unknown quantity of “phantom space” will restrain therecovery. This trend is already clear in the Downtownmarket, where leasing activity has increased but wherethere have been no significant improvements in vacancy or absorption. The vast majority of CBD activity in 2003was attributable mostly to occupancy shifts from one building to another; evidenced mostly in Class A space.Law, accounting, medical office, and other professional service firms created most of this activity; either by planningmoves or renegotiating existing lease terms. We look forthis situation to improve going forward. Since there hasbeen virtually no new speculative development, the market ispoised to show positive absorption when demand increases.

While not immune to the challenges facing the office market as evidenced by an 18.3% vacancy rate, Cleveland’ssuburbs are faring a bit better and actually achieved positive absorption of 207,762 square feet throughout2003. Suburban markets are poised to experience growth,particularly on the Westside, which offers reasonably pricedland, decent demand, existing infrastructure, migration of residential housing, and proximity to the airport and the CBD. Look recovery to be gradual in 2004, picking up steam later in the year and heading into 2005.However, until the market moves closer to equilibrium itwill be important for landlords to realize that a true shift in amount and use of space is occurring. Until market conditions improve considerably landlords will need toremain creative and flexible to attract and retain their tenant bases.


1999 326,999,000 3,300,000 3,724,000 7.4 5.502000 328,898,000 1,899,000 -3,088,000 8.9 5.502001 330,846,000 1,948,000 -7,162,000 11.8 4.502002 332,587,000 1,741,000 -1,120,000 12.5 3.502003 333,604,000 1,017,000 -5,682,000 10.3 4.10

Joseph J. Martanovic

1100 Superior Avenue, Suite 800Cleveland, OH 44114Tel 216-861-7200Fax 216-861-4672


1999 22,165,000 26,000 -134,000 15.3 23.002000 22,202,000 37,000 352,000 13.9 22.502001 22,202,000 0 -429,000 14.0 21.202002 22,907,000 705,000 -1,285,000 22.1 20.002003 22,922,000 15,000 -575,000 23.5 20.50

CLEV

ELAN

D,O

H

Downtown Office


1999 14,847,000 578,000 218,000 14.9 22.502000 15,715,000 868,000 771,000 15.4 23.302001 16,141,000 426,000 173,000 17.1 22.002002 16,338,000 197,000 348,000 15.4 21.602003 16,448,000 110,000 -61,000 18.3 20.90

Suburban Office

Industrial

Office IndustrialMirroring the regional and national trends, signs of increasingdemand were prevalent throughout Cleveland’s industrialsector, particularly from by warehouse/distribution users.

Indicators such as rising factory orders, low inventories and a weakening dollar should continue to encouragedemand for manufacturing space in 2004, however, notenough to increase rental rates, currently averaging $3.91per square foot for warehouse/manufacturing space and$6.82 per square foot for flex space. Rents are expectedto remain at current levels for the next 24-36 months.The overall vacancy rate continues to hover at 10.3%, andwill likely remain at or near this level throughout the nexttwelve months.

The local manufacturing economy is expected to showimprovements over the next year. Local industrial users arein the beginning phases of capital expenditure planning—anindicator of increased real estate demand—although thereremains a reluctance to make lease commitments for termsof more than three years. Meanwhile, small to midsize localmanufacturers have reported an increase in business activityover the past few months and buildings up to 50,000 squarefeet and over 100,000 square feet remain in demand. This hastranslated into multi-year contracts for some, specifically in the medical, aerospace, automotive, and chemical manufacturing industries. Manufacturing employment levels are not expected to increase significantly due tooverseas competition and improvement in productivity,therefore vacancy in manufacturing buildings will remainnear current levels.

29

CO

LUM

BIA,SC

The Columbia office market reached its lowest level ofvacancy at roughly 7.0% at mid-year 2001. Since that time,the market has declined, paralleling the weakening nationaleconomy during this period. The Columbia market hit bottom in the third quarter of 2003 with vacancy of 15.4%. While it may be premature to say that the market is currently in recovery, Charleston rebounded in thefourth quarter despite continued job losses and an economythat is still shaky. The market closed the year with vacancyrate of just under 15%. Class A properties remain in thestrongest position, thanks to continued demand for upgradespace. While new construction resulted in increasedSuburban Class A vacancy in 2003, solid occupancy growthin CBD Class A space more than countered these losses.

We look for occupancy to continue to grow in theColumbia office market, albeit slowly, throughout 2004.

Growth in office employment over the final half of 2003should continue to be a positive for the office market in2004. Although recent cutbacks in state government are a downside risk for the office market, occupancies are not expected to decline in the immediate future.Meanwhile, Columbia’s Business Improvement District(BID) continues to play a positive role in the economic well being of a prime 36-block area within the CBD in its efforts to recruit and retain businesses. As vacanciesincreased throughout the metro area over the past twoyears, properties located within the Business ImprovementDistrict have generally fared much better, with less negativeimpact on lease rates.


1999 26,519,000 1,048,000 1,183,000 6.8 3.252000 27,600,000 1,081,000 838,000 7.4 3.302001 28,374,000 774,000 1,354,000 5.2 3.902002 29,979,000 1,605,000 -995,000 13.4 3.902003 29,979,000 0 -1,084,000 15.4 3.90

Woody Moore, CCIM

P.O. Box 11610, 1301 Gervais Street, Suite 600Columbia, SC 29211-1610Tel 803-254-2300Fax 803-252-4532


1999 3,776,000 N/A N/A N/A 18.802000 3,776,000 0 50,000 9.2 18.502001 3,856,000 80,000 -214,000 10.5 18.802002 3,912,000 56,000 -203,000 15.5 18.002003 3,912,000 0 119,000 8.9 17.80

Downtown Office


1999 3,429,000 N/A N/A N/A 16.502000 3,519,000 90,000 103,000 7.6 17.002001 3,554,000 35,000 -41,000 15.2 18.002002 3,654,000 100,000 236,000 12.4 18.002003 3,729,000 75,000 -248,000 21.3 17.50

Suburban Office

Industrial

Office IndustrialThe Midlands Region witnessed a downturn in the industrialand distribution sector for the second consecutive year.Heavy losses in the local manufacturing and transportation/warehousing sectors led to the closing of several largemanufacturing and distribution facilities in the Columbiaarea. As a result, vacancies rose to 15.4% in the fourthquarter up from 13.4% a year ago, resulting in negativeabsorption of more than one million SF. This was in spiteof the fact that there was virtually no new industrial construction or development activity during 2003.The Lexington County market was particularly hard hit where the Michelin vacated 110,000 square feet ofwarehouse space and the closing of both ReturnBuy.comand Pirelli Cable resulted in the return of an additional500,000 square feet of space to the market.

But the news has not been all bad. While most lease transactions in 2003 were for deals of 20,000 square feetor less, there were a number of major deals in Charlestonlast year. The Trane Corporation purchased and occupied a 322,000 square foot facility in northeast Richland Countywhile the former 84,600 square foot Thomas and Bettsplant was acquired in Calhoun County. Despite challengesfaced by the overall market, demand for Class A distributionspace has remained intact, with rental rates holding steady atjust under $4.00 per square foot. Another positive is thatdevelopers have largely shied away from new constructionand, as a result, there was no significant speculative construction in 2003. While the Miller-Valentine group has plans to break ground on a new 170,000 square footdistribution center in Richland County during the firstquarter, we expect new development to remain restrainedthroughout 2004. All of these are positives to considerwhen forecasting 2004 activity, however, ultimately thelargest factor that will determine how quickly Charlestoncan rebound is the state of the overall economy. As such,look for 2004 to be a year of transition, with recoverybeginning to occur late in the year or in 2005.

30

The availability of sublease space has posed a challenge forlandlords in the Dallas over the past two years. The vastmajority of it second-generation space, sublease availabilitycurrently accounts for 4.9 million square feet of vacancythroughout the Dallas MSA. The good news is that today’stotal marks a reduction of nearly one million square feet.However, a large percentage of this space did not come offthe market as a result of being leased up. Instead what weare seeing is that as lease terms for un-leased subleasesexpire, this product simply becomes available as a directlease with landlords stepping back in to market this space.As a result, vacancy remains unchanged from the thirdquarter of this year. Landlords are anxious to renegotiateearly and extend leases at today’s rates to keep existingtenants locked in. Major deals of 2003 that illustrate thistrend include Gardere Wynne & Sewell signing of an earlyrenewal and extension for 180,000 square feet on a 13-year term, Sage Telecom’s renewal and extension (7-year term) on 115,000 square feet and Liberty MutualInsurance’s 10-year renewal on 108,000 square feet.

Looking ahead, leasing activity will continue to be the greatest in the major suburban markets of Far NorthDallas, Richardson/Plano, and Las Colinas. Free rent andhigher concession packages will most likely continue into2004, however, rates should remain static. Although economyis showing signs of improvement, job growth continues tobe the key and has yet to have occurred in significant numbers. We expect 2004 to be a transition year,with conditions expected to improve by year-end.


1999 567,171,000 19,724,000 16,568,000 6.6 3.002000 581,764,000 15,438,000 10,403,000 7.1 4.102001 602,000,000 20,161,000 914,000 10.1 3.502002 612,360,000 10,441,000 7,369,000 10.4 3.002003 617,451,000 5,400,000 -2,634,000 11.7 2.95

Allen Gump

9400 N. Central Expressway, Suite 250Dallas,TX 75231Tel 214-692-1100Fax 214-692-7600


1999 38,227,000 0 -503,000 23.8 21.002000 38,227,000 0 -294,000 24.6 22.502001 38,227,000 0 -360,000 25.5 25.002002 38,330,000 103,000 -245,000 26.3 19.002003 38,330,000 0 -691,000 28.1 18.50

DA

LLAS,T

X

Downtown Office


1999 190,864,000 14,107,000 10,472,000 13.4 23.002000 196,422,000 5,558,000 6,004,000 12.8 22.702001 204,772,000 8,350,000 -793,000 16.8 23.502002 208,282,000 3,510,000 -1,899,000 19.1 21.002003 210,756,000 2,474,000 -659,000 20.3 20.50

Suburban Office

Industrial

Office IndustrialThe Dallas industrial market experienced negative absorptionof just over 1.2 million square feet in the forth quarter of 2003.This left negative net absorption of 2.6 million square feet forthe year. While most submarkets posted negative absorption,the East Dallas, South Stemmons and North Fort Worthsubmarkets had strong showings, accounting for over 2.5million square feet of occupancy growth. By the close ofthe year, overall vacancy had risen to 11.7%. It is importantto note that much of this increase can be attributed to thelarge amount of space that came online at the close of theyear. Roughly 2.5 million square feet of new space wasdelivered during the fourth quarter. Total deliveries for theyear totaled 5.4 million square feet of product, just over halfwhat was delivered throughout 2002. Meanwhile, subleasespace continues to be a factor, with both the flex and industrial sectors reporting slight increases. With subleasespace accounting for 10.3% of all available space throughoutthe Dallas area, pricing continues to be soft.

Most of the current leasing activity is coming from consumergoods companies. Logistics companies continue to takedown space, and shorter-term deals continue to be popular.Going forward the Dallas metropolitan area is projected togain 2.2% or another 44,500 jobs, plus experience net growthin the manufacturing and tech industries. Leasing activity willcontinue to be the greatest in the major suburban marketsof Northeast Dallas, Great SW/Arlington, and DFW Airportbased on the abundance of direct and vacant space available.Look for new development to increase in 2004, but not surpassthe levels recorded in 2001 and 2002. Approximately 5.9million square feet of space is currently under construction,with the largest projects being a one million square footspeculative development in the DFW Airport submarket andan 890,000 square foot build-to-suit in the Great SW/Arlingtonsubmarket. In 2004, the commercial real estate industrywill turn the corner and is expected to rebound, although itmay be later in the year before the full impact of a nationalrecovery takes hold.

31

DEN

VER

,CO

After losing approximately 50,000 jobs and incurring 4.4million square feet of negative absorption in the DenverMetropolitan Service Area (DMSA) since 2001, it appearsas though the Denver office market has passed the lowpoint and, barring any unforeseen events, has started limpingtoward recovery. The DMSA recorded negative netabsorption of roughly 620,000 square feet during 2003,down considerably from 2002. Additionally, lease rates areno longer in a free-fall mode, and lease concessions are stabilizing. In the fourth quarter 2003, the DMSA rackedup over 140,000 square feet of positive absorption.Although the hard statistics are less than encouraging, thereare two significant positive aspects to the market that uponclose inspection reveal a change. Sublease space has continued to be absorbed over the last five consecutivequarters and it is only a matter of time until it spills overinto direct space. The second is that Class A spacethroughout the market, except for Colorado Boulevard/Glendale and Northwest, is reporting positive absorptionfor 2003.

The Denver office market is well-positioned for recovery.Leasing activity continues to increase. Economists are predicting 15,800 new jobs for the DMSA in 2004, which is a significant improvement from the 11,000 jobs lost in2003. Although job creation is a great indicator for theoffice market, numerous companies in the Denver areacontinue to underutilize their existing space. Therefore, allof the new jobs will not necessarily equate to positiveabsorption. This being said, job growth should neverthelesschange or mitigate the negative trend of the recent past forabsorption and rental rates on lease space offered directlyby landlords. Look for recovery to pick up momentumtowards late 2004 and heading into 2005.


1999 189,298,000 1,800,000 -471,000 5.5 4.002000 193,690,000 4,392,000 2,434,000 6.5 4.502001 195,590,000 1,900,000 -2,696,000 4.3 4.502002 196,790,000 1,200,000 -1,942,000 5.8 4.102003 197,190,000 400,000 -2,028,000 7.1 4.00

Geoffrey E. Kreusser, SIOR

13900 East Harvard Avenue, Suite 210Aurora, CO 80014Tel 303-745-5800Fax 303-745-5888


1999 24,351,000 22,000 288,000 7.3 24.402000 24,933,000 582,000 665,000 5.5 27.502001 25,118,000 185,000 -1,061,000 11.3 25.402002 25,374,000 256,000 -852,000 16.2 22.402003 25,659,000 285,000 139,000 18.2 20.50

Downtown Office


1999 67,335,000 5,028,000 2,106,000 9.5 26.502000 72,363,000 5,028,000 7,495,000 8.3 22.902001 76,181,000 3,818,000 -3,887,000 15.8 21.502002 80,997,000 4,816,000 -1,002,000 18.8 19.002003 81,568,000 571,000 -620,000 21.9 19.30

Suburban Office

Industrial

Office IndustrialThe Denver economy is driven to a large degree by thetelecommunications industry, which has been one of the hardest hit industries in the economic downturn.The recovery of the local economy will lag behind thenational recovery as additional telecom fallout is anticipated.The Denver industrial market will continue to suffer fromweak demand. Numerous business failures, mergers andconsolidations have contributed to the current vacancy levels. The amount of available sublease space hasincreased again as a new wave of sublease space has hit the market. Tenant incentives, including free rent, increasedtenant improvement allowances and broker incentives, havebecome commonplace. Owner/user properties for saleand investment properties continue to command stronginterest at premium pricing levels with very limited supply.

The reconstruction of a key 15-mile stretch of I-25, themajor north/south artery, began in 2002 and is expected to take 5 years and cost nearly $2 Billion. This project willadd additional lanes as well as a second major leg of a lightrail system. Denver International Airport opened a sixthrunway, which cost $166 million dollars and is 16,000 feetlong and 200 feet wide, making it the largest commercialrunway in North America. This new runway will allow fullyloaded jumbo jets additional length to take off in Denver’saltitude during summer months, thereby providing unrestricted global access.

32

Metropolitan Detroit's year-end office market statisticsreflect signs of increased momentum and stability.Overall absorption is positive, due to increased occupanciesin the Central Business District and New Center Area.The overall vacancy rate of 16.16% is one point lower than12 months ago, and sublease space currently representsless than 2% of overall vacancy. Even as vacancy is stabilizing, construction is on the upswing. Over 2.5 millionsquare feet of new office product was delivered to the metroarea in 2003 and is currently 70% occupied. The CampusMartius project in the New Center Area represents 43% ofthis new inventory. Although build-to-suit projects remainthe popular option, speculative construction has resurfacedwith approximately 30%-50% pre-leasing achieved prior tobreaking ground.

Detroit’s CBD will remain active throughout the next 24months as the city prepares to host the 2006 Superbowl.Meanwhile, government and local business collaborationswill result in additional workforce relocations and publicand private redevelopment projects throughout the area.Corporate relocations made news in 2003 with severalintra-state and inter-state announcements and this trend will continue throughout 2004 as state and local governments aggressively seek to attract employers.Throughout the coming year landlords will need to remainaggressive as the office sector is still weak and significantrecovery may take at least two years. This will remain ahighly competitive environment for landlords to attract and retain occupancy levels. There is no longer a standardproforma for leasing parameters.Those who realize this willmaintain occupancy and value in their real estate holdings.


1999 365,623,000 5,000,000 -592,900 10.8 5.802000 373,454,000 7,831,000 -1,752,000 9.0 5.702001 379,510,000 6,056,000 -11,789,000 12.6 6.002002 381,839,000 2,329,000 -12,891,000 13.1 4.802003 382,983,000 1,144,000 -5,626,000 14.2 4.80

Cameron P. McCausland

Colliers Office Plaza, 2 Corporate Drive, Suite 300Southfield, MI 48076Tel 248-540-1000Fax 248-540-1038


1999 24,953,000 N/A N/A N/A 23.702000 24,953,000 0 187,000 17.0 27.802001 24,953,000 0 -218,000 11.4 25.802002 25,099,000 146,000 -319,000 16.5 24.002003 26,179,000 1,080,000 569,000 17.3 21.00

DET

ROIT,M

I

Downtown Office


1999 86,023,000 1,345,000 971,000 6.5 24.502000 87,921,000 1,898,000 -236,000 7.1 24.302001 89,838,000 1,917,000 -1,927,000 12.8 25.302002 91,274,000 1,436,000 -3,015,000 15.0 24.802003 92,114,000 840,000 -807,000 16.4 23.00

Suburban Office

Industrial

Office IndustrialVacancy in the Detroit industrial market stood at 14.3% as ofthe close of 2003. This marks a slight increase over the 12.9%rate that was recorded at the close of 2002. A significantamount of this increase is attributable to new speculativeconstruction that was delivered to the marketplace over thepast twelve months. The market recorded roughly five millionsquare feet of negative net absorption during this period, adecline of over 1.1 million square feet from 2002’s total.While the Warehouse/Manufacturing absorption rate is onpar with the previous year, losses for R&D/High-Tech productslowed to less than 50% of the 2002’s negative total of880,755 square feet. The slowing of negative absorptionrates occurred mainly in the last two quarters of 2003, dueto a combination of slightly increased leasing activity coupledwith the decrease of mergers, acquisitions, and consolidationsin the manufacturing sector.

Detroit’s vacancy rate will remain at or near current levelsthroughout most of 2004 as most new construction willfocus on build-to-suit, single-purpose facilities. Industrial/flexspace users will continue to prefer this “custom-space” optionfor both expansion and consolidation needs as long as thepricing remains at or near levels for renting existing space.Warehouse/distribution facilities will continue to be in demand.Due to the state of Michigan's aggressive incentive programs,the Metro Detroit area may also see an increase in demandfor bio-med or tech/research space. Economists predict thestate will gain 76,000 jobs in 2004 and another 92,000 in2005; holding the unemployment rate steady at approximately7% throughout the next 12 months and decrease to 5.9% thefollowing year. Manufacturing jobs are expected to represent23,000 of the total created. However, as the Midwest isexpected to lag approximately 6-18 months behind the nationin experiencing significant positive growth. Full recovery is notexpected to be realized until 2005. In the meantime, look forcontinued strong demand for warehouse/distribution spacefor the retail industry and the seeming resurgence of thetechnology sector. And while the Detroit area may also see anincrease in demand for bio-med or tech/research space thanksto the state’s aggressive incentive programs, the local marketwill remain a highly competitive environment for landlords.

33

FT.LAU

DER

DA

LE/BROW

AR

D C

OU

NT

Y,FL

Fort Lauderdale’s CBD has turned the corner. Sublease spacehas decreased, and absorption is rebounding after two fullyears of decreased occupancy. Professional and financialservice companies make up a large portion of downtownleasing activity, particularly along the Las Olas corridor.Although the majority of new leases continue to be small,existing tenants have begun to expand. New developmenthas been minimal with only one 50,000 square foot buildingcurrently under construction. Despite this, the FortLauderdale continues to change. Numerous high-rise residential developments accounting for more than 3,000multi-family units are currently in various phases of construction. The emergence of Fort Lauderdale as a 24-hour urban center has contributed to the general optimism of the CBD and is viewed as a factor that willfurther strengthen the office market in the future.

Absorption has also been on an upward trend in the suburban Cypress Creek submarket which comes as goodnews for this historically depressed portion of the market.Over 300,000 square feet of sublease space was leasedthroughout 2003 while minimal new development helpedto further relieve pressure on existing vacant space.With no new construction under way, developers are waiting for this area to catch up with the rest of theCounty. Cypress Creek’s proximity to I-95, the FloridaTurnpike and Palm Beach County remain one of its assetsin attracting corporate interest. Meanwhile, developers in the Southwest Broward submarket are reacting toincreased tenant demand with over two million square feet of new office space currently under construction or in various stages of proposal. Tenant demand throughoutthe Fort Lauderdale/Broward County market is on the rise.Look for the market to continue to record significant gainsover the next year.


1999 83,242,000 2,794,000 -885,000 7.7 N/A2000 86,183,000 2,941,000 4,060,000 6.8 6.702001 89,513,000 3,330,000 2,049,000 9.4 5.802002 91,057,000 1,544,000 1,014,000 8.9 6.002003 92,588,000 1,531,000 2,379,000 8.0 6.30

Steven Wasserman, SIOR

6360 NW 5 Way, Suite 300Ft. Lauderdale, FL 33309-3082Tel 954-233-6000Fax 954-233-6010


1999 6,318,000 406,000 -71,000 6.3 29.002000 6,577,000 259,000 200,000 4.4 26.702001 6,754,000 177,000 49,000 12.5 25.502002 7,197,000 443,000 -55,000 17.5 26.202003 7,251,000 54,000 189,000 15.9 26.40

Downtown Office


1999 34,256,000 1,245,000 -686,000 10.1 21.502000 35,495,000 1,239,000 555,000 10.4 18.702001 37,949,000 2,454,000 967,000 17.3 24.702002 38,420,000 471,000 -12,000 15.5 23.702003 38,950,000 530,000 976,000 13.8 24.10

Suburban Office

Industrial

Office IndustrialInvestment deals continue to dominate activity in the FortLauderdale/Broward County industrial market, with BigMoney still pursuing well-leased industrial buildings and theowner-occupied market remaining sizzling hot. Deals inkedin 2003 include Prologis’ purchase of a portfolio of properties previously owned by Principal Life, as well aslarge sales involving space users Arizona Beverage andCrown Sanitary. However, a lack of available product continues to hamper investment activity. On the leasingfront, demand seems to be picking up after a relatively lackluster year. Larger deals that closed this year includeTrane’s lease of 55,000 square feet in Pompano Beach,Brands Mart and Show Management in Hollywood for150,000 square feet and Caremark in Miramar for 90,000square feet. Despite this, vacancy remains higher than normal. Small bays in the 5,000 square foot range seem tobe strongest property type, with competition among bulkwarehouse landlords for tenants remaining heightened.

There has been very little new construction due to thescarcity of land, with no new projects on the horizon.While this has helped to keep vacancy low, it has posed significant challenges to developers. The land bank forindustrial development is nearly depleted and developersthat currently own sites are no longer looking to sell.Meanwhile, of those few sites that are available many have development issues.As a result, prices are high, anddevelopers are having difficulty making economic sensewith new projects. Looking forward, expect continuedoccupancy growth. As the economic stimuli initiated twoyears ago by the federal government continues to positivelyaffect the national economy, we will begin to see more jobgrowth and further demand for space. Likewise, a likelyeventual increase in interest rates will slow owner/userinvestment activity and will also lead to an increase in leasing activity. The prognosis is one of cautious optimism.Expect leasing demand to continue to improve in 2004.

34

Demand for office space in 2003 was below average but isexpected to slowly increase during 2004. New developmenthas been centered in the rapidly growing northern tier ofFresno and in the Downtown area. At the same time,Downtown Fresno has experienced a resurgence due to an expansion of the Community Regional Medical Center,a new Triple-A baseball stadium and a commitment by various governmental agencies to stay or relocateDowntown. The Southeast/Airport submarket has alsoexperienced a resurgence due to the opening of Freeway168 and the City of Fresno’s new General Plan which has a focus of new development in Southeast Fresno.

Vacancy rates in all Suburban submarkets are holdingsteady with an overall vacancy rate of 7%.The Fresno-Clovismarket is expected to remain strong during 2004 with continued new development, especially in the northern submarkets. During 2003, due to the low interest rates,building and land sales continued to thrive although a lackof available product tempered activity. The low interestrates continue to negatively impact leasing activity as tenants opt instead to become owner/users. However, wheninterest rates begin to rise, it is expected that tenants willrevert to leasing rather than becoming owner/users.Look for leasing activity to gradually pick up throughout2004, picking up steam towards the end of the year.


1999 43,000,000 750,000 2,800,000 8.6 3.602000 44,000,000 1,000,000 1,200,000 6.0 3.202001 44,200,000 200,000 100,000 8.0 3.402002 44,600,000 400,000 0 9.0 3.202003 45,400,000 800,000 -30,000 10.8 3.20

Michael Schuh

7485 North Palm Avenue, Suite 110Fresno, CA 93711Tel 559-221-1271Fax 559-222-8744


1999 2,161,000 N/A N/A N/A 19.502000 2,161,000 0 150,000 12.3 15.602001 2,271,000 110,000 149,000 10.9 15.602002 2,418,000 147,000 86,000 12.7 18.002003 2,920,000 502,000 440,000 13.7 19.20

FRESN

O,C

A

Downtown Office


1999 12,420,000 213,000 160,000 12.0 23.502000 12,723,000 303,000 830,000 11.3 19.202001 13,284,000 561,000 694,000 10.4 19.202002 14,454,000 1,170,000 1,343,000 8.1 16.202003 14,513,000 59,000 60,000 7.0 19.20

Suburban Office

Industrial

Office IndustrialThroughout 2004 investment activity took center stage inthe Fresno industrial market, particularly deals driven byowner/user demand. Thanks to historically low interestrates, small to medium-sized businesses sought to purchaseproperties for their own use. This served to drain the poolof potential tenants in the leasing market as many of thesesame tenants would normally have opted to lease instead ofbuying. As a result, leasing activity was negatively impactedthroughout much of 2003. Meanwhile, subleases addedanother 400,000 square feet of availability to the marketover the course of the year creating further challenges.However, the Fresno industrial market showed significantsigns of improvement during the final three months of the year. A flurry of 11th-hour sales and leases were consummated during the fourth quarter as demand tickedup in the face of economic recovery.

All indications are that tenants are increasingly returning to the marketplace and that the market should continue totrend upward. A number of deals currently in the pipelineshould result in positive net absorption and decreasedvacancy by the end of the first quarter. Look for gradualrecovery throughout the year. Despite the economicmalaise of the past few years, Fresno’s overall fundamentalshave remained unchanged. Centrally located in the heart ofCalifornia, Fresno’s access to transportation networks andlower land costs remain extremely attractive, particularly toindustrial distribution users. At the same time, lower costsof living have made Fresno one of the fastest growing citiesin California. Expected overall economic gains throughout2004 will only help to build upon these fundamentals.

35

GR

EENV

ILLE,SC

In 2003, the Greenville office market turned in its worstperformance since Colliers began surveying the office market. The lingering effects of the economic recessioncontinued to negatively impact market conditions asdemand remained weak for the majority of the year.Overall market vacancies increased from year-end 2002 levels of 22.0% to the current rate of 23.9% and the marketrecorded negative net absorption of over 75,000 squarefeet throughout 2003. The only bright spot was a reduction in sublease space of almost 90,000 square feet,however, this was due more to lease terms expiring thandue to deal activity. Overall, 2003 can be best described as the year the market hit bottom, but as the year closed there were some signs that the market is poised for recovery.

We expect 2004 to be a year of recovery. Hopes are high for an improved economy that should translate intoemployment growth that will positively impact the officemarket. We are already beginning to see this happen.For example, continued expansion at BMW as well as theannouncement of the International Center for AutomotiveResearch (ICAR) Park will positively impact the entire market. Meanwhile, there has been new construction in the Woodruff Road, Simpsonville and Eastside areas.Future growth is expected in areas that are projected to experience an increase in residential and general commercial construction such as Greer and Travelers Rest. The overall continued growth of the Greenville area should bode well for all segments of the office market throughout the coming months.


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 42,829,000 N/A N/A N/A N/A2002 43,172,000 343,000 N/A 20.5 3.302003 43,434,000 262,000 -1,090,000 23.5 3.20

Bill Streyer, CCIM, SIOR

201 E. McBee Avenue, Suite 201Greenville, SC 29601Tel 864-297-4950Fax 864-527-5443


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 2,398,000 0 107,000 16.7 18.302002 2,581,000 183,000 129,000 16.6 18.302003 2,610,000 29,000 39,000 16.1 18.50

Downtown Office


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 3,298,000 0 113,000 28.0 17.302002 3,478,000 180,000 -56,000 32.1 18.002003 3,537,000 59,000 -9,000 33.1 17.50

Suburban Office

Industrial

Office IndustrialAs of the close of 2003, vacancy throughout the Greenvilleindustrial market reached 23.5%, up significantly from 20.5%at the end of last year. Both of these numbers mark historichighs and have come about as a result of numerous plantclosings, downsizing of ongoing manufacturing operationsand significant reductions in inventories. Still, it is clear thatconditions worsened throughout 2003 as local landlordscontinued to take hits. Ironically, one of the trends that has negatively impacted the leasing market is what hasmade the investment market very strong. For the mostpart local small businesses continued to expand over thepast year and many of them opted to take advantage of historically low interest rates to purchase their own buildings.This has made for a thriving sales market limited only bythe amount of space offered for sale.

Several positive sectors of the local economy, include continued growth by BMW, its suppliers, as well as a recentannouncement by G.E. that it will recall some employeesdue to increased business. As previously noted, small businesses are continuing to expand, thus taking advantageof low interest rates and depressed property prices. It isexpected that with improvement of the national economicsituation, the Upstate South Carolina area will continue tothrive as it has in recent years as a result of the excellentlabor force, outstanding quality of life, an excellent inter-state highway system, positive business environment andavailability of competitively priced real estate. A major economic development announcement in 2003 was that ofthe International Center for Automotive Research (ICAR).The ICAR Park, currently under construction at I-85 (Exit48) and U.S. Highway 276, will be the home for ClemsonUniversity’s Graduate School of Automotive Engineering,as well as BMW’s Information Technology Center.Other possible tenants in the Park include Microsoft andIBM. It is expected that this concentration of automotive-related technology will create a synergy for a major expansion of the well-established automotive industry andallied businesses in the Upstate Region of South Carolina.

36

As of the close of 2003, vacancy for Class A office space in the Downtown Hartford market stood at 14.9%, downsignificantly from the 16.9% recorded at the close of thethird quarter. Suburban properties also reported declinesin vacancy, with today’s rate of 20.7% marking a sizablereduction from the 21.3% recorded just three months ago.Leasing activity has largely focused on renewals or spaceswapping as tenants seek to take advantage of their negotiating power in a down market and upgrade theirspace. Yet, as of the close of the year there were somepromising developments.

While no one is arguing against the office markets remaining soft for the immediate future. However, we dosee the levels of sublease space easing. Rents will probablycontinue downward another 2-5% for the next severalmonths until they level off in the second half of 2004.On average, corporate earnings are healthier than theywere a year ago; the Dow regularly closes above the10,000 level while Nasdaq pushed through 2,000 recently.Further good news is the fact that the ConsumerConfidence Survey currently reports improved businessconditions and the highest level of consumer confidencesince the Fall of 2002. But, several key points must presentthemselves for any recovery to materialize: improved earnings pictures; improved confidence levels; a sustainedperiod of growth; and hiring - to offset job loss. While westill have significant vacancy in Greater Hartford County,Manpower Inc. recently reported more US employers areexpecting to increase hiring efforts in the first quarter of2004 than those reducing jobs. This marks the first time infive years that hiring expectations rose between Q4 andQ1 reporting periods. We are optimistic that these trendswill begin to materialize throughout the coming year, withsustained recovery occurring into 2005.


1999 61,857,000 150,000 150,000 14.5 4.002000 62,107,000 250,000 250,000 14.3 4.502001 62,257,000 150,000 160,000 14.2 4.502002 62,357,000 100,000 300,000 13.9 4.502003 63,174,000 817,000 900,000 13.2 4.30

Keith J. Kumnick, SIOR

864 Wethersfield AvenueHartford, CT 06114Tel 860-249-6521Fax 860-247-4067


1999 10,631,000 0 96,000 25.1 22.002000 10,631,000 0 470,000 20.8 22.102001 10,631,000 0 106,000 19.8 22.102002 10,631,000 0 -305,000 19.9 24.202003 10,631,000 0 -141,000 20.5 24.20

HA

RTFO

RD

,CT

Downtown Office


1999 13,260,000 0 849,000 15.7 20.002000 13,260,000 0 451,000 12.2 21.502001 13,385,000 125,000 -486,000 16.1 20.802002 13,684,000 299,000 -157,000 18.1 19.902003 14,157,000 473,000 -97,000 20.7 20.60

Suburban Office

Industrial

Office IndustrialActivity in the Connecticut industrial market during 2003was a mixed bag. While leasing activity was flat, buildingsales to smaller owner/users were up as were investmentsales and build to suit activity. Continued economic pressures resulted in a limited number of tenants for larger blocks of space to lease. Meanwhile, historic lows ininterest rates had a positive impact on the market as manylocally owned companies took advantage of the rates topurchase their own buildings.Their underlying businessesalso appeared stronger than the national companies.Interest rates and the perception that real estate is a “safehaven” combined to fuel considerable interest in investmentproperties even at a time that the underlying fundamentalsappear weak thanks to diminished leasing activity and higher than normal vacancy. These conditions have squarelyimpacted speculative development, however, there were anumber of build-to-suits in Connecticut during the pastyear. TJX built a 400,000 square foot bulk warehouse andhas plans for an additional 400,000 possible in 2005 or2006. Lowe’s went ahead with a million square foot facilitywhile Ford and ADVO combined for another 400,000square feet of new build-to-suit structures.

Looking ahead to 2004 the outlook is positive. We areaware of several other large space users currently lookingat sites in the area, though as these users of late have generally not been candidates for existing facilities due tospecial requirements (clear heights, column spacing, etc.) it islikely that they will opt for build-to-suits. Meanwhile, severallarger blocks of space available for sublease were taken orin the final stages of negotiation at year end. There was asubstantial increase in activity near year end and the newyear should pick up where this trend left off. It appearsthat overall business activity is up which should result inincreased demand which should be felt going forward.

37

HO

NO

LULU

,HI

The Honolulu office market is poised for a recovery as the overall economy is forecasted to post a solid 2% jobgrowth over the next few years. After weathering twoyears of soft market conditions, nearly 200,000 square feet of positive absorption was recorded for 2003, vacancyrates fell from 13.6% to 11.8% over the past year.Gradually increasing demand is anticipated with positiveabsorption forecasted for the next few years. Landlords willlikely continue to offer concessions of free rent and tenantimprovement allowances for new prospective tenants until vacancy rates fall to below 10% and job growth isdemonstrated by stronger tenant demand. Net rents will likely remain flat until year-end 2004 but operatingexpenses are anticipated to increase as the City & County of Honolulu is currently considering a property tax increase for commercial properties.

Both the residential real estate and construction industriesposted healthy gains over the past few years and this isprojected to continue as more than $2 Billion in federalhousing contracts will fuel ancilliary office job growth for the next few years. Vacancy rates are anticipated to drop below 10% by year-end 2005 with rental rateincreases projected.


1999 33,407,000 20,000 350,000 6.4 6.002000 33,447,000 40,000 833,040 4 8.642001 33,482,000 35,000 -181,000 4.4 8.302002 33,582,000 100,000 174,000 3.6 8.002003 33,632,000 50,000 199,383 2.7 10.92

Scott H. Higashi

Central Pacific Plaza220 South King Street, Suite 1800Honolulu, HI 96813Tel 808-524-2666Fax 808-521-0977


1999 N/A N/A N/A N/A 27.302000 N/A N/A N/A N/A N/A2001 7,932,000 0 -75,000 12.0 26.502002 7,932,000 0 -12,000 12.3 27.602003 7,932,000 0 19,000 12.1 27.80

Downtown Office


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 7,416,000 0 -146,000 13.4 N/A2002 7,416,000 0 -116,000 15.0 N/A2003 7,416,000 0 174,000 11.5 N/A

Suburban Office

Industrial

Office IndustrialTight market conditions persist as little new speculativedevelopment has occurred in more than 15 years.The reduction in industrial inventory as a result of gentrification of Kakaako and Manana areas, the State’s I-3 Waterfront Master Plan and changes to the land useordinance further hampered prospective tenant's search for available sites. Because there is virtually no vacant landavailable for construction in the urban core, gentrificationhas occurred among older poorly maintained residential orwarehouse properties located in Kalihi on land zoned forindustrial mixed-use. Land prices have escalated for thesesites as owner users pay premium rates for developablesites for their businesses.

Oahu’s industrial market posted nearly 200,000 square feetof positive absorption resulting in the industrial vacancyrate falling to 2.69% from 3.57% a year ago. Warehousedemand is anticipated to far outstrip any additional supplythat can be added to the market.The recovery in the retailsector and the hospitality industry as well the continuationof a healthy construction and real estate market will further exacerbate the supply crunch currently being faced.Vacancy rates should fall to record lows with sharp rentalrate increases expected.

38

The Houston office market continues to struggle with highvacancy and significant negative absorption in what couldbest be described as a tenant’s market. As of the close offourth quarter 2003, Downtown vacancy stood at 21.4%,down slightly from the 21.6% rate recorded in October.Suburban properties, while faring better overall, recordedincreases in vacancy as their total 16.6%,, up from 16.0% inthe third quarter. Increased vacancies in both direct andsublet space resulted in negative absorption for 2003.But there are some encouraging signs on the horizon.The gap is beginning to close between quoted rates andactual rental rates and this is a good sign that lease ratesare nearing stabilization. Meanwhile, construction has allbut stopped and it is unlikely that any new speculative,not already underway, will resurface in the near future

Going forward, market conditions are expected to remain in the tenant’s favor while landlords will be furtherchallenged by soft demand, rising supply, competitive ratesand a slow economy. Rental rates should begin to stabilizein the first half of 2004 as a result of the market adjustmentin rates in 2003. Tenant concessions such as free rent,additional tenant improvement dollars and free parking will continue to be used by landlords in 2004 to retain and attract new tenants. Sublease space will also continueto be a factor in the marketplace. It appears that the Houston office market is at or near bottom. The questionfor 2004 will be how long will it take for the improvednational economic picture to translate into restored tenant demand.


1999 380,903,000 6,457,000 485,000 7.7 4.202000 385,499,000 4,596,000 -1,276,000 10.7 6.102001 390,337,000 4,838,000 2,046,000 8.6 5.302002 395,379,000 5,042,000 -3,412,000 9.8 5.302003 398,373,000 2,994,000 -2,218,000 10.6 4.30

Gary Mabray

1300 Post Oak Boulevard, Suite 200Houston,TX 77056Tel 713-222-2111Fax 713-830-2118


1999 39,497,000 0 245,000 10.2 23.002000 39,497,000 0 769,000 7.8 22.702001 39,497,000 0 -282,000 9.5 24.202002 41,235,000 1,738,000 -1,145,000 15.0 24.202003 42,768,000 1,533,000 -1,095,000 21.4 22.40

HO

USTO

N,T

X

Downtown Office


1999 145,346,000 3,949,000 882,000 13.7 21.402000 148,372,000 3,026,000 3,450,000 13.1 21.602001 150,994,000 2,622,000 1,680,000 15.7 20.402002 152,952,000 1,958,000 -1,591,000 16.3 20.902003 154,284,000 1,332,000 -512,000 16.6 20.30

Suburban Office

Industrial

Office IndustrialThe Houston industrial market has experienced significantnegative net absorption over the past two years in whatcould best be described as an extended period of stagnationand contraction. There is currently over 80 million squarefeet of industrial space available for lease throughout themarket, or roughly the equivalent of the entire Pittsburghor Jacksonville industrial markets. Average vacancy ratesclimbed to almost 11% and new construction in 2003 wasat its lowest level since 1996. Yet, industrial occupancy anddevelopment trends follow the local economy, and the “Big4” drivers of the Houston Economy are the medical sector,the technology sector, the energy sector and the Port ofHouston. This multi-faceted economic base has spawnedthe development of a very unique, diverse inventory ofindustrial properties. Despite the challenges of the lastcouple of years, this diversity of product has provided relative stability to our industrial market. With currentvacancy at just 11% the market is in better shape thanmost, and much better positioned for full recovery.

Factors such as mobility, shifting logistical patterns, functionalobsolescence of some of the existing inventory, increasedregulatory requirements and tax incentives will continue todrive businesses out to the BW 8 submarket and beyond.Next, current cap rates and the growing 1031 market willcause investors to intensify their search for quality leasedindustrial properties. And finally, excess inventory in certainsubmarkets will lead developers to seek out new nichemarkets such as the 225/East Corridor and 288/South Belt submarkets for opportunities. We believe vacancy and absorption in 2004 will be marginally better than 2003with lease rates remaining flat and with incentives such asfree rent continuing. Meanwhile, new development willfocus primarily on build-to-suit projects, as opposed tospeculative development. This should also positively impact vacancy rates as the market moves toward equilibrium throughout 2004.

39

IND

IAN

APO

LIS,IN

Despite office occupancy levels decreasing in 2003, rentsare stabilizing, and limited new construction has set thestage for diminishing vacancy rates. The Indianapolis officemarket experienced 169,000 square feet of net occupancygrowth in 2003. Nearly all of this positive absorption tookplace in the CBD. Although occupancy declined in theIndianapolis’ suburban markets by just over 45,000 squarefeet, this marks an improvement over last year’s loss of morethan 100,000 square feet. New office building completionsadded a half million square feet of new inventory in 2003and two of those buildings, Interactive Intelligence in theNorthwest and Eight Parkwood Crossing in the North/CarmelSubmarket, together account for over half of the new spacebuilt in 2003. With the exception of 2002, last year had theleast amount of new office construction since 1997.

The Indianapolis office vacancy rate at the end of 2003 was 19.2%, up from 18.3% just twelve months ago.However, there was some good news as the year came to an end. While the overall vacancy rate increased, itdeclined in the CBD by almost two full percentage points.Ultimately, the biggest factor behind Indianapolis’ recoveryis the state of the overall economy. Building upon improvedeconomic fundamentals, evidenced during the last half of2003, we are looking forward to the general economicrecovery occurring in 2004 and 2005.This recovery willmean office employers will be re-hiring and need an average of 200 square feet of space per employee.Once the “shadow” space is backfilled, demand for newspace will be created. To achieve a vacancy rate of 10%,the Indianapolis office market will need to lease 2.7 millionsquare feet of new space. This will require the addition of 13,500 new jobs in the Indianapolis metropolitan area.With all the other fundamentals in place, job creation is key to the future success of metropolitan Indianapolis officespace. In the meantime, look for 2004 to be a transitionalyear for the Indianapolis office market as it positions itselffor recovery by late 2004 or 2005.


1999 187,101,000 4,601,000 4,258,000 6.9 4.252000 193,033,000 5,932,000 8,195,000 5.5 3.502001 198,844,000 5,811,000 276,000 8.2 4.502002 203,627,000 4,783,000 2,685,000 9.0 5.902003 206,335,000 2,708,000 3,234,000 8.6 4.80

Jeffrey L. Henry, SIOR

2500 One American SquareIndianapolis, IN 46282Tel 317-634-6363Fax 317-639-0504


1999 11,009,000 54,000 4,000 12.0 21.002000 11,223,000 214,000 -279,000 16.2 21.002001 11,698,000 475,000 65,000 19.0 21.502002 11,698,000 0 65,000 18.5 19.602003 11,698,000 0 214,000 16.7 19.60

Downtown Office


1999 14,280,000 972,000 647,000 10.9 21.002000 16,044,000 1,764,000 777,000 15.8 23.002001 16,932,000 888,000 685,000 16.2 20.802002 17,237,000 305,000 -109,000 18.3 19.002003 17,740,000 503,000 -45,000 20.9 19.00

Suburban Office

Industrial

Office IndustrialDespite the sluggish economic environment of 2003,the Central Indiana industrial market continues to grow.This is due largely to Indianapolis’ continuing emergence asa major distribution hub. Central Indiana developers haveadopted an “if you build it, they will come” philosophy andbusinesses have done precisely that as numerous largedeals were signed in 2003. These large, bulk deals helpedlower Indianapolis’ overall industrial vacancy rate to 8.6% at year’s end. Meanwhile, year-end net absorption for theIndianapolis industrial market totals 3.2 million square feet.This represents the highest level of occupancy growth inthree years, easily surpassing the 2.7 million sf of growthposted at the end of 2002 and the 276,000 sf recorded in 2001. These numbers are impressive considering theeconomic state in which they were achieved and suggestthat Indianapolis is poised for further improvement if theeconomy strengthens in 2004.

Many fundamentals already are in place for success in 2004.Distribution is a natural strength of central Indiana and willcontinue to be the driving force for the industrial market.Businesses remain attracted to Indianapolis’ central locationand relatively low costs. Likewise, developers remain committed to the Central Indiana market as evidenced bythe 6 million plus square feet of proposed development.Having this modern bulk space readily available will continue to give Indianapolis a leg up on competingMidwestern states. However, Indianapolis must also continue to lure different types of industrial users to themarket. The public/private partnership behind the CentralIndiana Life Sciences and its efforts to develop the regionas a world-class center for the life sciences industry is amajor step in that direction.

40

Jacksonville’s office market will remain essentially flat formost of 2004, with continuing improvement toward year-end.There has been very little speculative construction overthe past two years and most new development has beenbuild-to-suit activity. This trend will continue into 2004 and will play a positive role in the overall recovery of themarket. In the meantime, the new office development that does occur will be focused primarily in the Southsidesubmarket along the I-95 corridor. Flagler Center, a developing Southside business park, will be the primaryfocus for new office construction. Also look for the trendof office buildings being converted for multi-family use tocontinue in Downtown Jacksonville.

Looking ahead, absorption will be somewhat positive as a result of pent-up demand for office space.

Over the next twelve months vacancy levels will continueto decline in both the CBD and the suburbs. As conditionswithin the market continue to gradually improve rentalrates will again begin to post growth. However, a significantrecovery of the local office market is not expected untilthe second quarter of 2005. At the same time, investorinterest in the CBD will continue to focus on Class A office building opportunities.


1999 N/A N/A N/A N/A N/A2000 79,036,000 N/A N/A N/A N/A2001 79,474,000 438,000 -1,800,000 10.0 4.402002 79,944,000 470,000 -418,000 8.7 3.502003 81,720,000 1,776,000 2,126,000 8.7 3.50

Victor Narusas

One Independent Drive, Suite 2401Jacksonville, FL 32202Tel 800-393-1206Fax 904-353-4949


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 11,574,000 49,000 -269,000 9.7 18.902002 11,601,000 27,000 27,000 10.4 19.602003 11,741,000 140,000 -146,000 12.3 20.00

JAC

KSO

NV

ILLE,FL

Downtown Office


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 19,727,000 688,000 137,000 14.0 18.002002 20,105,000 378,000 -170,000 16.1 18.502003 20,748,000 643,000 1,057,000 13.6 18.00

Suburban Office

Industrial

Office IndustrialThe Jacksonville industrial market has remained remarkablyresilient throughout the recent downturn. While manyother markets experienced skyrocketing vacancy and considerable negative net absorption throughout the economic turbulence of the last two years, the Jacksonvillemarket remained fairly stable, with vacancy remaining below10%. Jacksonville’s strong business environment is theresult of public-private partnerships, regional cooperationand the advantages of consolidated government within thecity of Jacksonville and Duval County. In 2003, the strengthsof the local environment helped Jacksonville earn the #1ranking of Expansion Magazine as the “Hottest City” inAmerica for business relocation or expansion.

Going forward, leasing activity in the Jacksonville industrial market will continue at a steady pace in 2004.While moderate positive absorption is expected the overallvacancy level for the area will remain below 10%. For theyear, vacancy is projected to drop about one-half of onepercent. Meanwhile, rental rates will remain flat, with noconcessions in general. With conditions remaining relativelyfavorable for landlords, look for new industrial developmentto pick up in 2004. Construction will primarily be inresponse to user demand and build-to-suit deals.Most activity will focus on the Westside and Northside submarkets for large distribution centers although theSouthside submarket and St. Johns County are also primedfor eventual larger distribution center development.

41

KA

NSA

S CIT

Y,MO

Metropolitan Kansas City’s 41.2-million-square-foot office market had a vacancy of 22.2% at the end of 2003.Leasing activity was low and net absorption for the yearwas a negative 436,000 square feet. However, by the latterpart of the year tenants who had adopted a “wait-and-see”approach were beginning to return to the marketplace.At the end of the year H&R Block announced plans for a 500,000-square-foot corporate headquarters. The newbuilding will be in the Downtown market and is planned foroccupancy in 2006. When Block’s 1,500 employees moveto the Downtown market, it will receive a substantial andneeded boost. Downtown vacancy was 24.7% at the endof the year. Kansas City’s suburban markets are faring better than the CBD. Class A space in South JohnsonCounty, the largest suburban submarket, recorded positivenet absorption of 254,000 square feet in 2003. At the endof the year South Johnson County’s Class A vacancy was18.8%, while the metro average of 21.2%. This submarketcontinues to draw tenants to Class A space, as evidencedby a number of major deals including CBIZ’ new 105,000-square-foot building and American Identity’s move into a 75,000 square feet location.

Most construction completed in 2003 or under way for2004 was substantially leased prior to groundbreaking.In the fourth quarter, the law firm Shook Hardy & Baconoccupied a new 624,000-square-foot building in the Crown Center area south of Downtown. Late in 2004 the 350,000-square-foot Plaza Colonnade building will becompleted in the Plaza market. The law firm BlackwellSanders Peper Martin will occupy one-third of the building.Look for new development to continue to be dominatedby build-to-suit activity in 2004, which will help to keep a lid on vacancy rates while tenant demand graduallyreturns. Look for the Kansas City office market to begin a turnaround in 2004 and for gradual recovery to continuethroughout the year.


1999 153,208,000 3,773,000 3,484,000 5.3 3.802000 157,620,000 4,412,000 3,388,000 5.8 4.402001 160,443,000 2,823,000 -2,938,000 9.3 4.402002 162,641,000 2,198,000 92,000 10.5 3.802003 164,216,000 1,575,000 -237,000 11.5 3.80

S. Frazier Bell, SIOR

1220 Washington, Suite 100Kansas City, MO 64105Tel 816-221-2200Fax 816-842-2798


1999 9,752,000 190,000 283,000 11.0 20.702000 9,960,000 208,000 202,000 10.8 21.202001 10,140,000 180,000 -164,000 14.0 21.402002 10,270,000 130,000 -451,000 19.5 21.302003 10,894,000 624,000 -64,000 24.7 20.70

Downtown Office


1999 26,440,000 1,138,000 1,113,000 6.5 21.702000 28,189,000 1,749,000 899,000 9.1 22.102001 29,739,000 1,550,000 3,000 13.8 22.302002 30,239,000 500,000 -1,383,000 19.8 21.902003 30,346,000 107,000 -370,000 21.3 21.80

Suburban Office

Industrial

Office IndustrialKansas City's 164.2-million-square-foot industrial marketexperienced little activity in 2003. At the end of the year,vacancy was 11.5%, one point higher than at the end of2002. Although the pool of serious prospects for the 18.8million square feet of vacant space remains small, the latterpart of the year saw more companies checking theiroptions. Early in 2004 there may be a lease completed for 400,000 square feet of distribution space in southernJackson County. This would signal a rebound in progressfor Kansas City’s industrial market. Meanwhile, KansasCity’s strongest suburban market, Johnson County, recordednegative net absorption of 225,000 square feet in 2003.This was the first time in many years that absorption hadbeen negative in Johnson County. However, year-endvacancy was 10.7%, one point below the metro average.Two leases of more than 200,000 square feet were recorded in Johnson County during 2003.

Construction completions for 2003 totaled less than 1.6million square feet. Just 30% of construction for 2003 wasspeculative. Almost 90% of the property under constructionat the end of the year was in one underground facility of1.1 million square feet. Firms in the market today areshowing a preference for lower-cost, Class B distributionspace rather than more efficient but more costly Class Aspace. Also, the average size of transactions is smaller thanin the past, possibly reflecting incremental expansion byfirms unwilling to commit to large amounts of additionaloperating costs. However, the trend entering 2004 seemsto be for expansion rather than continued contraction.

42

Echoing past fourth quarter performances, Las Vegas officevacancy increased this quarter reversing declines posted in the third quarter of 2003. Vacancy currently stands at13.6%, down from the 12.4% mark recorded just threemonths ago. While most markets experience a slightreduction in leasing activity during the final quarter of anygiven year, the primary reason for this surge in vacancy wasthe large amount of space that was delivered to marketduring the final quarter of the year. New completionsincreased to 442,000 square feet of product during thefourth quarter, up from 248,000 square feet of new spacethat came online in the previous quarter. This was reflectedby the aforementioned increased vacancy as well as overalllosses in occupancy. This quarter marked the first time in2003 in which the market recorded negative net absorption,following three consecutive quarters of progressive gains.Rental rates, however, have not been impacted by this temporary setback and actually posted minimal growthduring the fourth quarter. The average asking rent foroffice space in Las Vegas currently stands at $1.83 persquare foot monthly, on a full service basis.

Looking ahead there are many reasons for optimism.The Nevada Department of Employment,Training andRehabilitation reported that job growth of office-orientedoccupational categories increased by 3.7% this quarter overlast. This growth was relatively even across industry types,with Financial Activities adding 600 jobs, Health Care &Social Assistance adding 500 jobs, and Professional &Business Services adding 100 jobs. Las Vegas continues tobe one of the fastest growing cities in the United Statesand one of the few markets where job creation is actuallyoccurring. As job growth is the greatest factor behinddemand, look for the local office market to continue torebound throughout 2004.


1999 64,556,000 3,424,000 3,622,000 7.9 7.302000 68,090,000 3,534,000 4,451,000 6.0 4.002001 73,087,000 4,997,000 1,521,000 8.4 4.602002 77,444,000 4,357,000 2,865,000 10.2 3.802003 80,367,000 2,923,000 1,434,000 11.5 4.80

Michael Mixer

3960 Howard Hughes Parkway, Suite 150Las Vegas, NV 89109Tel 702-735-5700Fax 702-731-5709


1999 9,781,000 0 35,000 5.7 28.202000 9,806,000 25,000 -95,000 14.8 24.002001 9,963,000 157,000 110,000 13.4 27.902002 10,270,000 307,000 22,000 21.9 27.202003 10,894,000 624,000 -64,000 24.7 20.70

LAS V

EGA

S,NV

Downtown Office


1999 16,564,000 1,405,000 1,436,000 10.1 24.602000 18,154,000 1,590,000 1,458,000 10.0 24.502001 20,045,000 1,891,000 722,000 13.6 25.902002 21,607,000 1,562,000 1,236,000 13.5 27.202003 22,865,000 1,258,000 956,000 13.4 29.80

Suburban Office

Industrial

Office IndustrialVacancy within the Las Vegas industrial market decreasedslightly from the 10.2% mark recorded in the third quarterof 2003, to 10.1% by the year’s end. This marks two consecutive quarters of decreased vacancy and signifies thatthe market is finally stabilizing. While last quarter’s declinesoccurred in the face of significant development, constructionactivity was sharply curtailed during the final three monthsof the year. Don’t look for this trend to continue in thenear future, however, as the amount of industrial spaceunder construction was up significantly as of the close ofthe year. The amount of product currently in the deliverypipeline increased to roughly two million square feet in thefourth quarter of 2003, indicating the sense of cautiousoptimism that both developers and lenders have about thefuture of the Valley’s market. Meanwhile, the average askingrent for industrial space remained stable this quarter atapproximately $0.56 per square foot, on a triple net basis.

Sustained growth in the industrial market will likely dependon continued growth in the construction and tourist industries. Construction employment grew to 83,100 jobsthis quarter, an increase from 82,600 last quarter. The pastfour quarters saw an increase in construction employmentof 9.5%. Overall, employment in sectors that traditionallyoccupy industrial space has increased to 157,600 jobs, upfrom 156,000 last quarter.This was the third straight quarter of industrial job growth. Job growth in the industrial sector this year stood at 6.1%.

43

LOS A

NG

ELES,CA

The economy is starting to build strength in Los AngelesCounty, and demand for office space has finally begun topick up. Net absorption totaled almost 250,000 square feet in the fourth quarter of 2003, bringing the total for the year to 1.2 million square feet of office space.This represents growth in occupied space at a pace of 0.8%per year – a modest pace, but positive growth in demandnevertheless. Vacancy rates are still high, due to cumulativeeffect of negative absorption in both 2001 and 2002, as wellas the impact of the construction boom of 1999 – 2002.Vacancy currently stands at 17.5%, however, it is beginningto trend downward. Rental rates dropped significantly in2001 and 2002, but are now stabilizing. Also, asking ratesnow are much more closely in-line with effective ratesbeing negotiated in the market place.

The construction spigot was finally turned off at the beginning of 2003, and only 620,000 square feet of newdevelopment is currently underway. This will enable themarket to continue to recover as the economy improves,and rental rates are projected to being rising again mid-2004. Long-term demand for office space in Los AngelesCounty is projected at approximately three million squarefeet per year, so this slowdown in development activityshould give the market time to absorb currently vacantspace. All markets within Los Angeles County have witnessed an improvement in market conditions, includingthe South Bay, where net absorption finally turned positivein the 4th quarter. Meanwhile, sale prices for buildings haveheld firm, despite the erosion in rental and vacancy rates in 2001 and 2002.


1999 656,745,000 26,408,000 38,090,000 5.4 6.602000 691,782,000 35,037,000 44,337,000 4.4 6.102001 721,586,000 29,804,000 14,628,000 6.3 6.602002 729,809,000 8,223,000 6,233,000 6.4 7.002003 736,916,000 7,107,000 11,085,000 3.6 6.40

Richard Davis

444 S. Flower Street, Suite 2200Los Angeles, CA 90071Tel 213-627-1214Fax 213-327-3200


1999 33,195,000 -100,000 -622,000 18.9 24.002000 33,195,000 0 -88,000 19.4 24.502001 33,269,000 74,000 478,000 18.4 24.602002 33,269,000 0 -67,000 19.5 24.002003 33,269,000 0 -86,000 19.8 24.20

Downtown Office


1999 126,810,000 5,788,000 6,654,000 11.9 28.002000 134,881,000 8,071,000 11,159,000 11.9 31.002001 137,821,000 2,940,000 -2,938,000 14.2 30.302002 140,687,000 2,866,000 -1,864,000 16.7 29.002003 142,038,000 1,351,000 1,252,000 17.0 28.30

Suburban Office

Industrial

Office IndustrialActivity was moderate over the final three months of 2003.Sales and leasing activity accounted for a total deal volumeof 12.2 million square feet, representing an annualized rateof “churn” equal to 6.7% of the overall industrial baseinventory. This rate of sale and leasing activity is equal to the level that was witnessed in the third quarter of theyear. Despite this, total occupancy growth as evidenced by net absorption dropped to 2.6 million square feet, downfrom the four million square feet recorded in the thirdquarter. Net absorption for the year as a whole totaled11.1 million square feet, representing growth in occupiedspace of 1.6%.This is a healthy pace for a very large,relatively mature industrial market, and is particularlystrong in light of the low vacancy rates in the market (just 3.6%). Demand remained intense for “for-sale” product, and supply limited. Sale prices reached newheights (for example, more than $90 per SF for recently-built buildings in the South Bay).

Construction activity picked up, but the new space thatcame online was quickly absorbed. The vacancy rate was steady at just 3.6%. Surprisingly, asking rental ratessoftened slightly despite the tight market conditions.We believe that this is temporary, and that rental rates are poised for an increase in the near future. Even thoughdemand for “for-sale” product is very strong and supplylimited, it is difficult to believe that prices will continue toclimb upward indefinitely; a correction appears likely if andwhen interest rates climb. Over the next 12 months, weproject that approximately 11 million square feet of newproduct will come online, expanding the inventory base by1.5%. This is slightly less than projected growth in demand,indicating that the market will remain tight. Tenants shouldlock in space now while there is still some flexibility in the market.

44


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 N/A N/A N/A N/A N/A2002 193,818,000 168,000 1,594,000 9.0 4.702003 200,270,000 6,452,000 9,149,000 6.2 4.70

Richard Davis

3401 Centrelake Drive, Suite 150Ontario, CA 91761Tel 909-605-9400Fax 909-605-9411

LOS A

NG

ELES,CA

– INLA

ND

EMPIR

E

Industrial

IndustrialDemand for industrial space in the Inland Empire remainedstrong throughout the final quarter of 2003. Sales and leasing activity totaled roughly 4.4 million square feet ofproduct. The total deal volume for the entire year reached19.2 million square feet or roughly 9.5% of the entire inventory base. This translated into actual net absorption,or occupancy growth, of over 9.1 million square feet ofproduct or an amazing overall growth rate of over five percent. The year closed strong with 2.4 million square feetof that growth occurring during the final three months ofthe year. These are exceptionally high levels of activity andnet absorption, typically among the strongest of any marketin the nation. The vast majority of demand continues to be for big-box space. The Inland Empire is the premierlocation for new big-box space in Southern California – the adjacent markets in Los Angeles, Orange and San DiegoCounties are starting to mature, and have a general lack ofnew modern facilities.

While demand has been high, construction activity has been moderate with just over 2.1 million square feet of space delivered during the final quarter of the year.New development has not kept pace with demand and, as a result, vacancy now stands at 6.2% down significantly fromthe 9.0% mark recorded just one year ago. These are verylow vacancy rates for the Inland Empire, where a very largeamount of construction has been taking place for morethan a decade. Rental rates have been slowly creeping up,and are up 7% relative to two years ago. These trends willcontinue into the near future with only 5.3 million squarefeet of space currently under-construction. This is a moderate amount for the Inland Empire and, with demandforecasted to increase, will likely play a factor in the furthertightening of the market.

45

LOU

ISVILLE,K

Y

As positive economic news begins to hit the Louisville,Kentucky market, the office market seems poised for arebound, even as the Downtown market was hit in mid-2003 with the announcement that a national companywould relocate its headquarters office from Louisville,adding (albeit though sublease) over 200,000 square feet of Class A space to the market. Despite a still slow fourthquarter 2003, the activity level is much stronger now thanfor the same period in 2002. The end of the year vacancystood relatively stable at 19.3%, compared to the 20.2% ratethat was recorded in the third quarter. Despite negative netabsorption of over 113,000 square feet in the downtownoffice market during 2003 Louisville recorded over 200,000square feet of positive absorption in the suburban marketfor the same period allowed Louisville to end 2003 withpositive overall absorption. Attractive landlord incentives,particularly for suburban space, have played a role in this recovery.

The outlook for the Louisville office market in 2004 ismuch more optimistic than the last few years. We remaincautiously optimistic for growth in the next twelve monthsand expect growth to occur at a much slower rate thannormal. However, activity and interest has started gainingmomentum. We expect vacancy to continue to stabilize in2004 and to show declines later in the year. The key factorwill be continued overall economic growth and the positiveimpact that this will have on overall demand.


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 N/A N/A N/A N/A N/A2002 36,920,000 561,000 -231,000 19.0 3.402003 37,645,000 725,000 1,716,000 16.7 3.30

Douglas H. Owen

7316 New LaGrange RoadLouisville, KY 40222Tel 502-426-1300Fax 502-426-8543


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 8,821,000 0 -374,000 16.2 16.102002 9,062,000 241,000 -125,000 18.5 20.002003 9,062,000 0 -25,000 21.0 19.40

Downtown Office


1999 N/A N/A N/A N/A 18.502000 N/A N/A N/A N/A N/A2001 8,095,000 146,000 176,000 19.5 17.902002 8,364,000 269,000 261,000 19.1 17.502003 8,364,000 0 172,000 17.7 17.70

Suburban Office

Industrial

Office IndustrialA surge of activity over the second half of 2003 renewedoptimism that a full-scale recovery is underway. By theclose of the year absorption was up significantly and vacancywas headed downward. Leasing activity came from a varietyof sources, ranging from bargain hunters and tenants lookingto upgrade their space to new space requirements.Landlords reduced renewal rates to keep existing tenantswhile several developers lowered asking rents on newproperties to also attract space users. Due to the retention of the existing tenants and new leases signed,the Class A market has solidified to the point that new construction is expected by the end of the second quarterof 2004. While vacancy in the Class A market has droppedto 12% from a high of 22%, Class B and C space has feltthe pinch. Demand for upgrades at bargain rates has meantthat many space users have opted not to renew leases in older properties, particularly those suffering from functional obsolescence.

We expect the Louisville industrial market to continue torebound in 2004. While the market for space in the 30,000to 60,000 square foot range remains soft, we see consider-able interest in properties on the far ends of the spectrum.Look for new industrial development to return to the market this year and for rents to begin to trend back topre-recession numbers late in 2004 heading into 2005.

46

The Memphis office market recorded a rise in Downtownvacancy during the final quarter of the year, from the 19.0%mark recorded in October to today’s rate of 20.7%.Suburban properties fared better, with vacancy droppingslightly from 15.7% to 15.4% over the final three months of 2003. As a whole, the market is holding steady, but conditions clearly favor tenants. However, there have beensome positives for landlords as well. Sublease space is finally getting absorbed through a combination of leasingactivity and expirations. New development has been minimal and rents have remained stable throughout theyear, with the current average asking rate totaling $16.62per square foot annually, on a full service basis.

While leasing activity was subdued for much of 2003,pent-up demand and bargain hunters continue to driveleasing activity, despite the fact that there seem to be more space users looking. New construction will remain a non-factor with little development currently underway.The Memphis market has not had any speculative constructionsince 2002 and it is unlikely to have any during the first halfof 2004 either. The overall economy is rebounding, but itremains unclear as to when this expansion will translateinto more local office jobs. While we are experiencing an uptick in activity and look for gradual improvementsthroughout 2004, it is likely that Memphis will not experience significant recovery until 2005. Until then,this will remain a tenant’s market with the pendulum moving slowly back towards equilibrium.


1999 142,848,000 4,900,000 5,600,000 14.4 4.002000 149,348,000 6,500,000 8,200,000 12.8 2.802001 152,698,000 3,350,000 2,100,000 14.0 3.002002 155,198,000 2,500,000 -2,700,000 16.9 2.502003 159,196,000 3,998,000 3,972,000 16.3 2.40

Eugene Woods, SIOR

3644 Winchester Road, Suite 101Memphis,TN 38118-5924Tel 901-375-4800Fax 901-375-9600


1999 3,403,000 0 -20,000 25.0 19.002000 3,578,000 175,000 200,000 24.2 18.002001 3,593,000 15,000 -27,000 21.2 18.802002 3,593,000 0 206,000 21.5 16.602003 3,593,000 0 -18,000 23.4 17.00

MEM

PHIS,T

N

Downtown Office


1999 14,036,000 240,000 100,000 14.5 19.002000 14,751,000 715,000 600,000 12.7 21.002001 16,049,000 1,298,000 -117,000 18.8 18.802002 16,829,000 780,000 70,000 15.6 18.902003 17,077,000 248,000 159,000 15.4 19.50

Suburban Office

Industrial

Office IndustrialAs of the close of the year, industrial vacancy in the greaterMemphis area stood at 16.7%. While a vacancy rate in thehigh teens is nothing “to write home about,” it does mark aslight reduction from the 17.0% peak recorded during thefirst quarter of 2003. Since that time, the Memphis markethas stabilized and has begun to record slight decreases.More importantly, the market has held its own despite considerable new development. Over four million squarefeet of new product came online throughout the year,with a whopping 2.5 million square feet of industrial spacedelivered in the fourth quarter alone. Yet, the market alsorecorded over 2.8 million square feet of occupancy growthduring this time. Demand has increased significantly fromjust one year ago. However, with so much new productcoming to market, it has yet resulted in significantlydecreased vacancy rates.

There is roughly 650,000 square feet of speculative spaceslated for first quarter delivery, of which 0% has been pre-leased. As such, we expect current trends to continueinto the near future. Look for vacancy to remain at or nearcurrent levels, with a small increase possible during the firstquarter of 2004. Sublease space continues to be a factor, accounting for roughly 3.3 million square feet ofavailable space throughout the Memphis metro. We expectthis number to continue to shrink through a combination ofdeal activity and lease expirations, but it will continue toheighten competition among landlords for quality tenants.

47

MIA

MI,FL

Leasing activity in Miami’s CBD remained slow, with the majority of the transactions being smaller deals.While absorption in the Downtown market was low in2003, the amount of available sublease space has comedown by almost half. One of the reasons for the low CBDactivity is the significant proliferation of Class A space inother submarkets such as Brickell and Airport West, where executives can work closer to their residences. There wasno completed construction in the CBD in 2003, however,there is a 163,000 square foot, Class A build-to-suit thatwill come online in January 2004. However, because thisbuilding is already 82% pre-leased it should not significantlyimpact vacancy rates.

Miami’s suburban Brickell submarket continues to be a hub of new development, both commercial and residential.New projects completed and on the horizon are revivingthe urban living concept and changing this area to a “24-Hour City.” The Four Seasons Hotel & Tower wascompleted in October, including an office component ofover 200,000 square feet. Additionally, Espirito Santo Plaza,a mixed-use project including an office tower with 260,000square feet of Class A office space, is due to open inJanuary 2004. However, with all the new optimistic development, this submarket now has the second highestvacancy rate in the metropolitan area. Further contributingto this high rate is the completion of the Four SeasonTower, which presently is only 30% leased. However, as theeconomy improves in the US, and Latin America—whichhas a huge impact on this region—this submarket, like all ofMiami-Dade County, is sure to show marked improvement.


1999 N/A 2,355,000 -2,589,000 6.9 N/A2000 185,128,000 1,419,000 1,319,000 7.1 6.002001 188,023,000 2,895,000 -556,000 9.8 5.002002 189,750,000 1,727,000 -1,302,000 9.4 5.902003 190,764,000 1,014,000 2,934,000 8.2 5.90


5201 Blue Lagoon Drive, Suite 650Miami, FL 33126Tel 305-265-3434Fax 305-265-3435


1999 8,686,000 0 -154,000 10.0 28.002000 8,686,000 0 34,000 10.0 28.002001 8,686,000 0 0 10.7 27.802002 8,686,000 0 -284,000 11.9 28.202003 8,686,000 0 42,000 11.6 29.60

Downtown Office


1999 56,026,000 624,000 -744,000 8.4 N/A2000 56,026,000 0 1,541,000 6.5 27.202001 57,501,000 1,475,000 -449,000 11.8 28.002002 58,934,000 1,433,000 -114,000 12.3 28.702003 59,659,000 725,000 533,000 12.5 29.70

Suburban Office

Industrial

Office IndustrialThe Miami industrial market ended 2003 on a high note asabsorption rebounded strongly in the second half of theyear. As a result, vacancy dropped slightly to 12.1% fromthe 12.2% mark recorded at year-end 2002. This marks the lowest vacancy rate recorded in over three years and is the result of increasing demand for most property types.Landlords with smaller offerings have particularly benefited.Small bays in the 5,000 square foot range have seen strongactivity and have been very attractive to both local credittenants as well as some national users. Activity has variedwidely based on geography. While the Northern Dade submarket remained fairly active, leasing remained fairlystagnant within the Airport West submarket, with subleaseactivity accounting for the most deal activity. In this markettenants expanded into subleases at tremendously discountedrates. Regardless, the overall trend prevalent throughoutthe marketplace has been one of significant improvementwith tenants willing to sign longer leases and lock in a lowbase rental rates.

Presently, just over one million square feet of new space isunder construction. The scarcity of land has posed challengesto developers for future growth. However, demand forwarehouses is setting records for the number of purchasesmade this year, including two major deals. Keystone PropertyTrust purchased the 1.7 million square foot InternationalCorporate Park. Meanwhile, the 3.4 million square footMiami International Commerce Center was purchased by PS Business Parks. A rebound in the economy in LatinAmerica is predicted to spur renewed activity in the warehouse sector.There also is the possibility of the secretariat of the Free Trade of the Americas setting upheadquarters in Miami, which will have a huge impact onthe area’s commerce.

48

Milwaukee’s overall office market rebounded in the 4thQuarter of 2003. Gains in the suburban submarkets outpaced losses in Milwaukee’s CBD thanks to a considerable uptick in overall activity. Throughout the final three months of the year, suburban landlords benefitedfrom the return of leases of all sizes. Small, medium andlarge lease transactions occurred in both Class A and Bbuildings in the suburban market. While new constructionin Milwaukee’s suburbs remained primarily in the form ofbuild-to-suit projects, a number of speculative projects arenot only being planned, but also being filled. These trendsshould continue forward into 2004 with the suburban landlords will enjoy stabilization and even growth withrespect to the performance of their investments throughout 2004.

Despite good news from the suburbs, the downtown officemarket remains challenged in terms of demand We haveseen very little in terms of new demand for anything butnewly constructed Class A properties. Meanwhile, Class Bproperties have suffered the most as much leasing activitycontinues to focus on tenants upgrading their spaces andtaking advantage of aggressive owner proposals for olderClass A properties. The immediate outlook is that downtown office landlords will have to become more and more aggressive to chase deals. Overall national and regional economic expansion translating into local job growth will eventually stem this tide. In the meantime,however, downtown tenants will be in the driver’s seat and landlords in Milwaukee’s CBD will likely continue toface challenges.


1999 N/A N/A N/A N/A N/A2000 256,217,000 3,000,000 400,000 3.7 4.002001 258,717,000 2,500,000 1,200,000 6.0 4.002002 260,217,000 1,500,000 -1,500,000 7.7 4.002003 264,724,000 4,507,000 6,911,000 6.7 4.30

James Barry III

1232 North Edison StreetMilwaukee,WI 53202Tel 414-271-1870Fax 414-271-1478


1999 14,195,000 65,000 105,000 15.7 N/A2000 14,310,000 115,000 74,000 15.0 23.502001 14,310,000 0 250,000 14.5 23.002002 14,505,000 195,000 877,000 9.3 23.002003 15,032,000 527,000 328,000 10.7 23.00

MILW

AU

KEE,W

I

Downtown Office


1999 42,436,000 550,000 110,000 14.8 N/A2000 42,953,000 517,000 318,000 9.1 21.502001 43,547,000 594,000 371,000 24.6 21.002002 44,458,000 911,000 N/A 11.9 21.002003 44,958,000 500,000 1,737,000 10.8 21.00

Suburban Office

Industrial

Office IndustrialThe 4th Quarter of 2003 proved to be a turning point forthe industrial real estate market in Milwaukee. Vacancy ratesstabilized as new space finally began to be absorbed again.More importantly, the level of demand for space increasedin the 4th Quarter. Beyond actual signed deals, space userswere more active with more showings, letters of intent andtangible offers reported by active brokers in the marketplace.While the basis for this observation is somewhat anecdotal,there is a substantial increase of deals in the pipeline and itappears as though the “wait and see” approach that manytenants had adopted is gradually being replaced by action.The results of this activity should be observable in the firstquarter of 2004.

The forecast for 2004 is upbeat. The lack of space in certain submarkets and the lack of speculative building during the past few years will, in all likelihood, put upwardpressure on lease rates and prices. Several new speculativeor partially-speculative buildings are already planned orunder construction; and more should come on line.Finally, 2004 will see more conversions of obsolete,multi-story industrial properties in Milwaukee, as they are transformed to housing and other uses.

49

MIN

NEA

POLIS,M

N

One year after seeing record-level vacancy rates, the TwinCities office market ended 2003 on a guarded high note,with a combined vacancy rate of 18.9%, down from 21.1%at the end of 2002. This improvement is due in large partto the continued absorption of sublease space, with 1.4million available square feet reported at year end, downfrom the 2.4 million square feet posted just one year ago.As with most national markets, the majority of the officesupply in the Twin Cities can be traced back to corporatedownsizing, bankruptcies and several major tenants optingfor property ownership. Given these challenges, landlordscontinued to offer generous and sometimes creative incentives, dependent, of course, upon the overall health oftheir properties. If a building was 90% leased, discountingwas moderate, primarily to remain competitive. If, however,the occupancy rate fell below 75%, property ownersoffered aggressive concessions.

The Minneapolis and St. Paul Central Business Districtsended 2003 very differently. Minneapolis property owners,faced with a surplus of prime space on their hands, foundcreative ways to attract and retain high-quality tenants.St. Paul property owners on the other hand, chose a different, yet equally creative route. The submarket towatch this past year was the Southwest Metro. The year2003 was a challenging, yet hopeful one for this area of thecity. Movements of major, multi-tenant users into ownedreal estate took a toll, leaving this sector with 141,849square feet in negative absorption at year-end and a directvacancy rate of 14.0%. It is important to note, however,that throughout 2003, this submarket saw an almost 60%reduction in available sublease space, and ended the yearwith a combined vacancy rate of 15.7%, down from 19.5%at the end of 2002. The good news for this submarket isthat economic pundits predict it will be one of the fastestrecovering office markets in the Twin Cities.


1999 66,409,000 3,600,000 2,870,000 8.6 4.602000 68,609,000 2,200,000 1,846,000 9.4 4.702001 71,872,000 3,263,000 1,084,000 13.4 4.302002 74,856,000 2,984,000 1,546,000 17.0 4.402003 74,907,000 51,000 1,673,000 14.0 4.10

Mark W. Reiling, CRE, SIOR

200 South Sixth Street, Suite 1400Minneapolis, MN 55402Tel 612-341-4444Fax 612-347-9389


1999 20,657,000 0 370,000 7.1 28.402000 21,584,000 927,000 573,000 7.2 28.702001 23,500,000 1,916,000 513,000 12.2 27.602002 24,428,000 928,000 -1,400,000 21.3 23.502003 24,428,000 0 -35,000 20.4 25.10

Downtown Office


1999 29,385,000 1,154,000 366,000 10.5 26.002000 31,199,000 1,814,000 1,489,000 12.7 27.502001 33,301,000 2,102,000 1,664,000 17.6 27.002002 34,640,000 1,339,000 180,000 20.3 23.502003 34,640,000 0 2,038,000 16.3 27.40

Suburban Office

Industrial

Office IndustrialFor the Twin Cities industrial market, the close of 2003brought encouraging news, with over 185,000 square feetof absorption reported in the last half of the year and a1.6% drop in the vacancy rate from the 14.0% markrecorded at midyear to 12.4% at the close of 2003.Throughout the year, there were steady renewals of space,after an initial period of corporate contractions. Demandfor new industrial space existed, but the preponderance ofthe requested spaces were in the 20,000 to 30,000 square-foot range. Sublease space continued to play a major role,with 1.1 million square feet reported at year end. This has particularly impacted office/showroom product, whichaccounts for 25% of the total market. Office/showroomsublease offerings currently account for roughly 270,000square feet of available space. Yet, this product type stillclosed the year with vacancy of 11.8%, down from 16.5%one year ago.

Though market activity picked up during the latter half of the year, much of this was focused on renewals.Many tenants opted to stay put, using the incentives offeredby prospective landlords as leverage when renegotiatingtheir current leases. In a similar vein, some property owners, after successfully refinancing their existing debt,chose to allow space to remain vacant, rather than “giveaway the house.” Still, the overall news was encouragingand there are plenty of reasons to be optimistic about2004. Tenant interest is already returning despite the factthat the economic turnaround has yet to produce seriousjob growth.

The first jobs to be added as the economy improves will be by industrial space users. We expect absorption in therange of 0.5% to 1.0% of the occupied base. There will be a few construction starts in 2004, but it will be a slow yearfor actual development. All of these factors bode well forthe market to move closer to balance between supply and demand.

50

The Music City’s CBD posted solid numbers, due in part to the selection of Downtown as the headquarter locationfor two recent corporate arrivals. Louisiana-Pacific leased78,000 square feet in the Bank of America Plaza andCaremark Rx will occupy 23,000 square feet in theCommerce Center. This renewed interest has helped to keep asking rates stable. Look for possible additionalconcessions in early 2004 as space becomes available whenRoundabout Plaza is completed and CBD tenants departfor this new facility. The CBD continues its resurgencewith the construction of numerous residential loft projects,the completion of the Bank of America Plaza renovations,and the opening of new entertainment venues onBroadway. The Schermerhorn Symphony Center for the Nashville Symphony is under construction and theNashville Sounds continue their quest for a mixed-use ballpark on the Thermal Transfer Plant site.

The suburban markets rebounded very strongly in thefourth quarter with a vacancy rate almost two percentagepoints lower than the previous quarter. Positive netabsorption of 380,000 square feet was achieved this quarter putting absorption for the entire year at a positive331,000 square feet. Sublease availability is down almost200,000 square feet from the first quarter and as demandpicks up, based on expectations for 2004, concessionsshould begin to moderate. There are a number of projectson the drawing board but construction starts could bemonths, if not years, away; therefore, any dramatic increasein demand in the short run will cause a shift from a tenant-driven to equilibrium and eventually an owner-driven market.


1999 162,441,438 3,470,366 4,586,370 3.3 3.502000 166,480,524 4,039,086 3,159,384 3.7 3.302001 170,645,574 4,165,050 1,569,904 5.2 3.002002 172,134,000 1,488,426 -2,288,749 7.3 3.002003 173,858,000 1,724,000 1,358,000 7.5 3.00

Charley Hankla, SIOR

5250 Virginia Way, Suite 100Brentwood,TN 37027Tel 615-301-2800Fax 615-301-2958


1999 5,285,000 N/A 32,000 7.0 20.002000 5,968,000 683,000 330,000 11.7 19.802001 5,990,000 22,000 -143,000 14.5 18.502002 6,036,000 46,000 112,000 13.3 18.302003 6,036,000 0 54,000 12.4 18.80

NA

SHV

ILLE,TN

Downtown Office


1999 15,283,000 1,260,000 1,115,000 8.5 19.002000 16,443,000 1,160,000 730,000 10.5 19.502001 17,977,000 1,534,000 647,000 14.5 18.502002 18,954,000 977,000 457,000 16.5 18.502003 19,397,000 443,000 331,000 16.7 18.80

Suburban Office

Industrial

Office IndustrialNashville’s current market-wide vacancy rate of 7.5% marksan improvement of a full percentage point over the thirdquarter 2003 rate of 8.5% and closely approximates theyear-end 2002 rate of 7.3%. The quarterly positive netabsorption rate of 2.2 million square feet is the highestmarket-wide net absorption value since the first quarter of 1998 and enabled 2003 to close at a positive 1.4 millionsquare feet. Some notable bulk activity in the Southeastsubmarket this quarter included a 515,000 square footlease by Cinram, a 135,000 square foot lease by Hill’s PetFood and the Space Park South Distribution Center posting 100,000 square feet of positive net absorption.The South submarket also experienced a significant transaction with a 200,000 square foot lease while theIndustrial CBD had MetCom Center, a former Kroger distribution center, posting 80,000 square feet of positivenet absorption.

Big box speculative construction for 2003 was minimal with a focus on build-to-suit; consequently, new productdeliveries totaled 1.7 million square feet with net absorption at 1.3 million. Projecting this into 2004, supplystill exceeds demand but there are minimal speculativeprojects ongoing. Big box owners are therefore biding time until market demand for these large spaces increase.In the short-term, look for speculative construction to besubdued but developers will step up with build-to-suits for strong credit tenants. Existing and build-to-suit standalones in the 15,000 to 40,000 square foot range remain in demand.

51

NEW

JERSEY

– CEN

TR

AL

Vacancy crept slightly upward in the Central New Jerseyoffice market over the final three months of 2003. As ofthe close of the year it stood at 15.5%, up from 15.2% inthe third quarter of this year. The Central New Jerseyoffice market continues to be impacted by the weakness in the technology sector, particularly job losses in thetelecommunications sector. Owners have become morecompetitive, loosening loosen credit requirements andwork allowances. Savvy space users remain active in themarket, seeking to capitalize on the strength that tenantscurrently have in negotiations.

While leasing activity began to increase heading into thelatter half of 2003, there are some key submarkets thatcontinue to struggle. For example, rents and values remain depressed for much of the Middlesex submarket.Aging inventory, often with some degree of functionalobsolescence, is the problem here. Most of Middlesex’sbuildings date to the 1970's. This is a problem in a statewhere more than 80% of the office space was built after1981. In addition, many of these buildings have large floorplates and were designed for the back office operationswhich left New York City in the mid-70's. Unfortunately,the computer has replaced many of these jobs and theremainder have relocated offshore. Yet, other submarkets,such as Bucks County, have managed to do very well, luringnew users such as Pharmaceutical and related industries.Access to labor, ability to network into well-heeled sourcesof capital as well as quality of life issues dominate the decision-making process, which increasingly looks to BucksCounty and beyond as viable locations. Looking ahead, weexpect demand to continue to trend upward and for themarket to record occupancy gains throughout 2004.Newer Class A properties will turn in the strongest performances, while aging Class B and C buildings may continue to face significant challenges.


1999 251,950,000 3,675,000 3,927,000 7.2 5.202000 255,200,000 3,250,000 3,725,000 5.7 5.502001 262,355,000 7,155,000 1,479,000 9.2 5.002002 267,632,000 5,277,000 -2,031,000 8.3 5.002003 268,491,000 859,000 7,137,000 5.9 4.50

Jonathan Tesser, SIOR

200 Cottontail LaneSomerset, NJ 08873Tel 732-868-5111Fax 732-868-8055

Industrial

Office IndustrialThis market has performed very well in 2003, reversing thetrend of negative absorption that marked much of 2002 asthe market struggled with job losses in the manufacturingsector. Yet, since that time the market has turned the corner. Users and investors continue to be out in the market in force, searching for product to be purchased;and best of all, positive net absorption continues to gainmomentum dropping vacancy rates throughout centralNew Jersey. This has yet to translate into significant rentgrowth as rents have largely remained below the highsachieved prior to the most recent downturn. Part of thereason for this is the fact many space users continue toprefer new build-to-suit options rather than lease existingvacant speculative space. Buildings for sale command a premium not only from users, but also from investors,who are flush with cash and short on product to buy.With rents still 10% below the peak of 2000, a further marketing tightening should being to restore rents to theirprevious levels, unless another flood of speculative buildingis commenced.

The Central New Jersey industrial market remains resilient.Unemployment statistics in New Jersey continue to remainbelow that of the national average. Broad gains in the services and construction industries were responsible formost of the job growth. But a marked slowing of job lossesin the long depressed manufacturing sector has also helped.Regions such as Edison & Exit 8A of the New JerseyTurnpike (South Brunswick, Cranbury, & Monroe Township)have seen a recent spike in leasing and sales activity. Bothnew construction and second and third generation facilitiesare slowly but surely being absorbed; decreasing vacancyrates County and statewide. We expect these positives to continue and increase in 2004 as the overall economypicks up steam.

52


1999 91,996,000 3,651,000 3,010,000 9.4 29.002000 93,773,000 1,777,000 2,524,000 6.0 26.902001 95,940,000 2,167,000 1,330,000 11.8 24.302002 98,439,000 2,499,000 -1,387,000 15.3 23.502003 99,013,000 574,000 719,000 15.5 24.00

Office

The Northern New Jersey office market closed 2004 withvacancy that hovered around 14%. The past twelve monthshave been challenging for many local landlords, with dealactivity and volume both down significantly and the marketposting negative net absorption of over 300,000 square feetfor the year. Meanwhile, new supply continued to come to market adding to woes on the demand side. Over 1.7million square feet of product came to market in the fourthquarter of 2003, the vast majority of which is attributableto the completion of office towers in Jersey City andHoboken. But, the news is not all bleak. The market endedthe year on an upnote with 1.1 million square feet of positive absorption growth in the fourth quarter. Much ofthis is from occupancy within the previously mentionedoffice tower projects. This growth at the close of the yearbrought the market into the black for the year in terms of absorption.

The key to the recovery of this market is job growth andhere recent predictions for 2004 have been for more than70,000 new jobs in this year, compared to an average of51,000 during the past decade and about 40,000 the pastyear or so. If this comes to pass, the market should begin work off the vacant space, especially in HudsonCounty where job losses in the financial services sectionbeginning in 2000 resulted in the vacancy rating soaring.Northern New Jersey remains a diversified economy,however, except for the Hudson County Waterfront where subway lines to New York City have resulted in aheavy concentration of financial service sector jobs. As aresult, the region should benefit from the continued strongshowing of consumer spending, residential construction,and pharmaceuticals, since much of the office space in the region is occupied by firms in these industries.New construction should grind to a halt by the end of 2004,with very little new product planned for 2005 and 2006.

NEW

JERSEY

– NO

RTH

ERN

OfficeIndustrial IndustrialThe Northern New Jersey industrial market has been a model of stability throughout the recent economic downturn. This is a mature market with few developmentopportunities and as a result vacancy has remainedextremely low even while other national markets experienced significant decreases in occupied space.Since the second quarter of 2002, there has been a decline of roughly six million square feet of previouslyvacant space. With a vacancy rate of only 5% and little construction possible due to the dearth of vacant land,market values and rental rates should climb in 2004 giventhe projections for economic growth and continued consumer spending.

As this is one of the more mature markets in the country,there is a substantial amount of functionally obsolete spacethat will disappear as higher and better uses are warrantedeconomically. As a result, while rents are still 10% less thanpeaks in the summer of 2001, this condition should soondisappear and the market should reach new highs in eitherthe end of 2004 or early into 2005. The only negative hereis that the newer product is most 15-20 years old, andcompared with more rural locations, is somewhat obsoletefrom the standpoint of clear height, the ratio of truck docksto floor area, and the amount of land available for trailerparking. On the other hand, given its location in the centerof the largest concentration of consumer purchasing powerin the world, tenants are willing to make compromises to bein this market and be close to New York City.

Jonathan Tesser, SIOR

The Atrium, 400 Glenpointe Centre W.Teaneck, NJ 07666Tel 201-692-8100Fax 201-692-8113


1999 417,213,000 946,000 4,902,000 5.3 5.502000 418,573,000 1,360,000 6,630,000 3.6 5.902001 420,447,000 1,874,000 -2,493,000 5.5 6.302002 420,998,000 551,000 1,602,000 5.3 6.202003 421,823,000 825,000 2,811,000 4.9 5.90

Industrial

53


1999 142,458,000 3,750,000 4,100,000 13.1 29.002000 145,458,000 3,000,000 4,600,000 8.8 29.002001 148,571,000 3,113,000 510,000 11.1 30.002002 152,752,000 4,181,000 1,449,000 12.6 25.002003 155,099,000 2,347,000 -318,000 13.6 28.70

Office

NEW

YOR

K

Midtown Manhattan

Despite stronger leasing activity in 2003, the ManhattanClass A vacancy rate still managed to edge up closing theyear at 11.3% from 10.7% twelve months ago. New buildingscoming online and tenants signing leases for less space (in some cases) were the reasons for the seemingly contradictory statistics. There was an easing of subleaseavailability, which fell from just under 11million to 9.6 millionsquare feet of product. However, direct space more thanmade up the difference, rising from 12.1 million to over14.8 million square feet of available space. The overall market actually performed slightly better with a minordrop in its vacancy rate over the past twelve months, from12.6% to 12.5%, owing to the fact that the Class B marketwas quite active, especially in Midtown South. This dispelledthe rumor that there was a flight to class A space in thepast year due to lower average asking rents. The significantClass B market, with almost 155 million square feet ofinventory, consists of many buildings that while older and in less prime locations, have been recently upgraded.

Looking ahead, expect several major deals to close in thefirst half of 2004, in both Midtown and Downtown. Early inthe year,Time Warner Center will open and the variousunits of the company will relocate to this Columbus Circlelocation. This will create several big blocks of availabilityacross Midtown. Additionally, space being vacated by APwill enter into statistics. At best, therefore, vacancy rateswill remain relatively static over the first two quarters ofthe year. Meanwhile, average asking rents will hold flat inMidtown while most likely falling slightly Downtown.

Office IndustrialDowntown Manhattan

Downtown Manhattan was a mixed bag in 2003 as sometruly remarkable deals closed while other large blocks hitthe market. After opening the year with a class A vacancyrate of 14.1%, Downtown saw leasing activity drive it downto 12.0% by June but by the close of the year, it had risenagain to 14.2%. The major culprit was a 500,000-sf block ofsublease space at 199 Water Street held by Prudential. It ismerging with Wachovia and may give up yet more spaceDowntown at 2 New York Plaza. One large deal expectedto finally close early in 2004 is the 400,000-sf CadwaladerWickersham & Taft transaction at 1 World Financial Center.Another law firm, Morgan & Finnegan will relocate fromMidtown to just over 104,000-sf of space formerly occu-pied by Lehman Brothers at 3 World Financial Center.

Expect to see more of these deals in 2004 as many of theincentives driving this market expire at the end of the year.Downtown, though, will not be left without a bargainingtool. Most likely, the beginning of 2004 will see a new version of REAP (Relocation Employment Assistance Program)passed by the New York state legislature. Formerly a taxbenefit program set aside just for the outer boroughs andupper Manhattan, the new version will cover LowerManhattan for tenants relocating Downtown from out of state (New Jersey or Connecticut for instance).


1999 104,594,000 0 2,255,000 8.2 37.002000 104,594,000 0 4,021,000 4.5 46.202001 91,194,000 -13,400,000 -19,195,000 11.4 42.502002 91,194,000 0 -2,742,000 14.4 36.402003 91,194,000 0 446,000 14.2 33.90

Nicola M. Heryet

40 East 52nd Street, 11th FloorNew York, NY 10022Tel 212-758-0800Fax 212-758-6190


1999 239,213,000 1,600,000 3,900,000 6.4 54.002000 239,213,000 0 1,445,000 5.4 65.402001 240,068,000 855,000 -12,916,000 10.4 61.302002 242,574,000 2,506,000 -573,000 11.4 54.702003 244,472,000 1,898,000 888,000 11.8 52.40

Midtown Manhattan Office


1999 N/A N/A N/A N/A N/A2000 98,131,000 0 787,000 5.5 38.002001 98,131,000 0 -7,256,000 12.9 43.802002 98,131,000 0 -998,000 14.0 34.002003 98,131,000 0 1,460,000 12.5 27.60

Midtown South Manhattan Office

Downtown Manhattan Office

54

New York Suburban – Fairfield County, CT

Both the overall Fairfield market and its Stamford submarkethave shown little or no improvement this year. The Class Avacancy for Fairfield climbed to 20.3% by year’s end, up from19.6% in September. The Stamford submarket experienceda similar trend, with vacancy creeping up to 19.6% from the17.7% rate recorded at the close of the third quarter.The brighter spot has been the upscale Greenwich submarket with its vacancy rate closing 2003 at 15.2%,down slightly from 15.3% in September. Leasing activity at the end of 2003 was focused largely on the Greenwichsubmarket. In a major expansion,Amaranth Advisorsleased 123,000 square feet, while AQR Capital Managementleased 21,737 square feet and Sagamore Hill CapitalManagement subleased 18,925 square feet.

Declines in occupancy were reflected in negative rentalgrowth for the market as a whole. Average Class A askingrents for Fairfield dropped in the fourth quarter by 9% to$28.76 per square foot, on a full service basis. However,individual submarkets fared better. Stamford asking ratesfor Class A space increased slightly to $30.90 per squarefoot while Greenwich rents jumped from $47.31 to $51.84per square foot over the final quarter of the year.


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 39,873,000 0 -2,074,000 16.5 26.302002 39,873,000 0 704,000 14.8 26.102003 39,873,000 0 407,000 13.7 27.00

Nicola M. Heryet

40 East 52nd Street, 11th FloorNew York, NY 10022Tel 212-758-0800Fax 212-758-6190


1999 N/A N/A N/A N/A 24.502000 N/A N/A N/A N/A N/A2001 56,779,000 0 -3,797,000 14.1 30.802002 56,779,000 0 -1,810,000 17.3 30.802003 56,779,000 0 29,000 17.3 28.80

NEW

YOR

K

Fairfield County, CT Suburban Office Westchester County, NY Suburban Office

OfficeNew York Suburban – Westchester County, NY

The Westchester Class A vacancy rate slid to 13.5% as of the close of 2003, down from the 15.3% rate that wasrecorded in the third quarter. This trend was repeated in the White Plains submarket, as Class A vacancy easedslightly to 19.1% from 21.3%. A number of large blocks ofspace remain available within the White Plains submarket,however, this comes as excellent news to landlords whohave weathered fierce competition for seemingly elusivetenants. Meanwhile, average asking rents remain flat-lined withlittle or no change. The average rent for Class A propertiesin Westchester is currently $26.95 per square foot annually,on a full service basis while the White Plains average is $27.24.Leasing activity remains subdued compared to the activityrecorded just a few years ago, however, the market didexperience some major recent expansions. Argent Mortgageleased an additional 82,000 square feet after just signing for112,000 square feet earlier this year. Also, EnduranceReinsurance Corporation took 17,540 square feet, addingto the 21,000 square foot office that it had initially leased at 333 Westchester.

55

OA

KLA

ND

,CA

The Oakland – East Bay market continues to benefitprospective tenants as asking rents for available Class Aoffice spaces fell to $2.18 per square foot monthly on a fullservice basis, down from $4.24 in 2000. Class A averageasking rents in the Downtown Oakland market fell to$2.27.The drop in rents prompted BART to close on a203,000 square foot lease at Summit Commercial’s newlyacquired Kaiser Center at 300 Lakeside Drive. BART willuse this space to consolidate its operations. Most of thetransactions for the quarter were less than 5,000 squarefeet but these leases have helped decrease the DowntownOakland Class A vacancy to 13.8%and net absorption forthe first three quarter for the year was positive 109,006square feet. This is the first time we have experienced positive absorption in the past three years. We believe thatpositive net absorption in the Downtown Oakland Class Amarket can partially be attributed to the “flight to quality”trend we are seeing in other submarkets in the Bay Area.

As the population in California continues to grow,Oakland – East Bay will out perform other submarkets in the Bay Area due to its central location and under utilized infrastructure.A growing residential population will stimulate retail, restaurant and entertainment development. We believe commercial property values here will appreciate faster than most other markets in the region over the next several years.


1999 159,444,000 1,619,000 3,135,000 5.3 6.202000 160,354,000 910,000 3,455,000 3.8 10.402001 161,919,000 1,565,000 -4,148,000 8.0 5.702002 162,807,000 888,000 -1,544,000 9.3 4.602003 162,976,000 169,000 276,000 9.1 4.50

Ken Meyersieck

1999 Harrison Street, Suite 1750Oakland, CA 94612Tel 510-986-6770Fax 510-986-6775


1999 12,311,000 0 515,000 7.6 30.002000 12,311,000 0 334,000 4.8 51.202001 12,311,000 0 -278,000 8.9 37.202002 12,839,000 528,000 -238,000 15.5 26.702003 12,839,000 0 -130,000 15.7 26.20

Downtown Office


1999 45,986,000 1,741,000 1,957,000 5.3 30.002000 46,870,000 884,000 3,204,000 1.7 44.002001 49,783,000 2,913,000 -396,000 12.9 35.302002 51,125,000 1,342,000 -1,129,000 17.8 28.202003 52,129,000 1,004,000 1,431,000 16.3 23.50

Suburban Office

Industrial

Office IndustrialThe Oakland – East Bay industrial market appears to havereached its bottom and it is only a matter of time before ittakes a turn in the other direction. Leasing and sale activityacross the board had definitely increased in the last quarter,which is very encouraging, especially in the user sales market where correctly priced properties are selling.There has also been an increase in the number of largerwarehouse deals in the market.

The year-end vacancy rate was virtually unchanged over the last year, staying at approximately 9%. This rate actuallydeclined if you omit over 1 million square feet of the totalinventory that consists of three warehouse/distributionbuildings that may be converted to other non-industrialuses. Even with decent market activity the average warehouse asking rents still declined by about 6.9% from$4.64 to $4.50 per square foot annually, on a triple netbasis. In the Industrial sector, the vacancy rate increased bynearly half, rising to 9.3%. In the R&D sector, the vacancyrate more than doubled from 9.5% to 21%, and the lack ofdeals in this sector has made for very misleading askingrental rates. Although the average rental rates are currently$13.14 per square foot annually, actual deal rates are nearly30% below the average asking rate. Owners were reluctantto lower rates in a market with such little activity.Across all market segments there was an increase in leasing concessions in the form of free rent, tenantimprovements, to lease terms.

56

Demand for office space in Orange County exploded in thefourth quarter, with the market recording net absorption ofroughly 1.4 million square feet of space. This brings 2003’stotal occupancy growth to roughly 2.9 million square feet,or an astonishing rate of growth in occupied space of 5.0%for the year.The local economy is clearly recovering, andthere has been particularly strong demand from professionalservice firms. Yet, despite this, vacancy rates are still relatively high at 16.2%. Much of this is residue from the construction boom of 1999 - 2002, however, it is vital to note that today’s level of vacancy does mark a sharpreduction from the 19.1% rate recorded one year ago.But, this explosion in demand has yet to significantly impactrental rate growth with average rents running at about 20%below the peak levels recorded three years ago. Asking ratesare now much more closely in-line with effective ratesbeing negotiated in the market place.

The development spigot was finally turned off at the beginning of 2003, and just over 200,000 square feet of new construction is currently underway. This will enablethe market to continue to recover rapidly, and rental rates are projected to begin rising again mid-to-late 2004.The prognosis for the immediate future is excellent, withlong-term demand for office space in Orange County projected at approximately 2.0 to 2.5 million square feetper year. Most of the growth in demand is projected tooccur in the Airport Area and in South County, where large concentrations of high-tech, communication and professional-service firms exist.


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 204,786,000 N/A N/A N/A N/A2002 205,678,000 892,000 -1,458,000 6.6 7.002003 206,901,000 1,223,000 2,083,000 6.6 7.20

Richard Davis

One Park Plaza, Suite 100Irvine, CA 92614Tel 949-474-0707Fax 949-724-5600

OR

AN

GE C

OU

NT

Y,CA

Industrial

Office IndustrialDemand for industrial space in Orange County picked up considerably during the fourth quarter of 2003.Net absorption totaled 920,000 square feet of space overthe final three months of the year, with the market totalingnet absorption of 2.1 million square feet for the year.This equates to a moderate growth level of 1.1%.The industrial market in Orange County is still lagging theoffice market, which showed very strong growth in demandthroughout 2003. Demand remained intense for investmentproduct. However, it was the same story here as it was inmost other major U.S. markets. Lack of supply limited theamount of activity that could take place. As a result, saleprices have skyrocketed, and now average $80 per SF, andmore than $100 per SF for small buildings. But with littleor nothing to trade into, even otherwise willing sellers have shied away from selling their properties.

Overall vacancy rate inched downward to 6.6%, downslightly from the 6.8% recorded last quarter and the 7.1% level posted one year ago. Meanwhile, after fallingapproximately 15% throughout 2001 and 2002, the weighted average rental rate stabilized in the first half of the year, and then increased throughout the second half,to $7.00 per square foot annually, on a triple net basis.Construction activity is limited. Over the next 12 monthswe estimate that approximately one million square feet ofnew product will be delivered. We also forecast continuedgrowth in demand. Look for vacancy rates to continue to tighten in 2004 and rental rates beginning to climb significantly near year-end.

57

OR

LAN

DO

,FL

Vacancy in the Orlando office market continued to trendupward in the fourth quarter of 2003. Suburban vacancyclimbed slightly to 14.6% while vacancy for DowntownClass A space remained steady at 18.1%. The highestincreases were in the ailing Maitland submarket and theonce shining East Orange submarket. Rental rates continueto trend downward across the market across all classes.New development has scaled back significantly with theexception of a few select office condo projects inMetroWest, Lake Mary, as well as the Plaza mixed-usedevelopment in Downtown.

Yet, despite these setbacks, the overall perception is that aturnaround is coming for the office market by the end of2004. Significantly reduced development should help givethe market some time to absorb currently vacant space.Meanwhile, the Central Florida office market continues toride the coat tails of a resurgent US economy. The stateleads the nation in population and job growth, and thistrend should continue through 2004. The Central Floridaoffice market is poised for the next growth spurt in theeconomy, with economy.com ranking Central Florida as the 10th best market in the nation in terms of job growth.Going forward, 2004 will be a transitional year with markedimprovement coming by year-end.


1999 97,963,000 813,000 -339,000 7.2 N/A2000 99,809,000 1,846,000 1,658,000 7.3 5.902001 103,389,000 3,580,000 2,425,000 10.4 4.202002 104,995,000 1,606,000 -369,000 11.0 4.302003 106,422,000 1,427,000 -298,000 11.9 4.10

Matt Sullivan

622 East Washington Street, Suite 300Orlando, FL 32801Tel 407-843-1723Fax 407-843-4485


1999 7,150,000 337,000 216,000 6.1 25.202000 7,907,000 757,000 414,000 9.0 25.402001 7,993,000 86,000 104,000 12.0 25.302002 7,993,000 0 -149,000 11.8 23.602003 8,213,000 220,000 135,000 12.5 22.80

Downtown Office


1999 33,830,000 490,000 438,000 7.1 18.002000 35,767,000 1,937,000 2,212,000 8.2 19.802001 38,380,000 2,613,000 672,000 13.1 20.602002 39,213,000 833,000 187,000 12.9 20.302003 39,931,000 718,000 -97,000 14.6 20.20

Suburban Office

Industrial

Office IndustrialOn paper the Central Florida industrial market looks to be getting worse. Vacancy worsened throughout the fourthquarter of 2003 and overall occupancy growth was still negative. Average rental rates for flex space dropped, whilerates for manufacturing and warehouse space barely heldtheir own. Yet, despite these negatives, there have beensome signs of an inevitable turnaround.

As of the close of the year, it was apparent that overalldemand for industrial space was increasing. While this hasyet to translate into actual net absorption, we are seeingmore leasing deals in the works or in various stages of thepipeline. Whereas local players had dominated deal activitythroughout the recent downturn, we are now beginning tosee more inquiries coming from out-of-state and corporateclients. The bargain deals in the class B and C propertiesare mostly taken, so premier properties are once again seeing more action. While it may be too soon to say thatthe market has finally turned the corner, the perception onthe street is that the worst is over and the market willbegin to show signs of marked improvement by the close of first quarter. This optimism is also visible in the return of speculative development to the market, such asCrownpointe Distribution Center—currently under construction in SW Orange County. Look for the marketto begin to rebound in early 2004, with increasing signs ofrecovery in late 2004.

58

Leasing activity is predicted to increase in both the CBDand suburban markets during 2004. However, absorptionwill not be significant. In CBD Philadelphia, there will be ahigher volume of lease rollovers during the next year, butthe large tenants currently in the market will be tradingone location for another and many have downsized theirrequirements. Conditions will struggle to improve during2004 for many Pennsylvania suburban markets even with aslowdown of new construction and an increase in leasingactivity. There remains a multi-year supply of space on themarket and there is the possibility of several large corporate mergers, acquisitions and realignments thatcould result in further vacancies over the next year.The office market in Southern New Jersey has remainedrelatively healthy and increased demand is likely to result in a shortage of larger blocks of quality space. The LehighValley and Northern Delaware markets are also predictedto slowly improve during 2004.

Construction will begin on the first new CBD building inover a decade. New construction will be minimal in thesuburban markets. Some developers in the PennsylvaniaSuburbs are scaling back on plans for new office buildingsand attempting to rezone for residential and retail uses.Investment activity was brisk during 2003, but maydecrease during 2004 due to a lack of product.Rental rates are likely to remain flat through 2004.


1999 394,928,000 350,000 1,227,081 13.1 2.502000 397,513,000 2,585,000 3,446,000 8.5 3.902001 403,899,000 6,386,000 -2,422,000 12.7 4.002002 405,303,000 1,404,000 -6,367,000 13.8 4.002003 406,489,000 1,186,000 4,281,000 12.3 4.00

James J. Scott, SIOR

399 Market StreetPhiladelphia, PA 19106Tel 215-925-4600Fax 215-925-1040


1999 38,615,000 215,000 1,517,000 10.7 25.002000 38,615,000 0 727,000 8.8 28.402001 38,615,000 0 -1,349,000 12.3 23.502002 38,615,000 0 -816,000 14.4 23.002003 38,615,000 0 561,000 13.0 23.30

PHILA

DELPH

IA,PA

Downtown Office


1999 83,940,000 1,885,000 699,000 7.9 25.002000 85,698,000 1,758,000 -1,741,000 9.4 23.502001 88,479,000 2,781,000 -1,465,000 13.2 24.002002 90,752,000 2,273,000 -1,003,000 13.7 23.002003 92,526,000 1,774,000 -880,000 17.4 24.30

Suburban Office

Industrial

Office IndustrialThe City of Brotherly Love’s industrial market as a wholeshowed signs of recovery during 2003.

Although Philadelphia’s suburban markets endured flatdemand and ongoing downsizing and consolidation,Philadelphia County, Southern New Jersey, Delaware andthe Lehigh Valley all recorded decreased vacancy over thecourse of 2003. The current vacancy rate in PhiladelphiaCounty is at its lowest level in three years thanks to astrong market for user sales and a continued trend of redeveloping vacant industrial properties for retail,educational and residential uses. South New Jersey’s vacancy rate declined despite numerous bulk warehousevacancies of 100,000 square feet or more and the fact thatthe majority of deals have been less than 50,000 squarefeet. Meanwhile, slow but steady demand and a slowdownin construction lead to a decrease in the vacancy rate inDelaware to just over 13%. Conditions in the Lehigh ValleyIndustrial Market also improved over the last year, with adecrease in vacancy from 16.3 to 14.6%. In this marketdemand has increased to the point were there is a shortage of product, particularly in blocks under 50,000square feet, and big-box construction has resumed, after a two-year lull.

With the exception of the Pennsylvania Suburbs, vacancydecreased across the board. Leasing activity increased substantially over the final half of 2003 while new construction was minimal. The overall vacancy rate willreturn to the single-digits in 2004. Look for leasing activityto continue to pick up heading into 2004. Also expectdevelopers to become more active, with new constructionpicking up later in the year.

59

PHO

ENIX

,AZ

Over 225,000 square feet of new inventory was added tothe Phoenix office market in the fourth quarter of 2003.This brings the total amount of new office construction for the year to roughly 1.8 million square feet of product.Yet, despite such aggressive new development overallvacancy dropped from 17.8% at year-end 2002 to today’srate of 16.7%. The largest drop in vacancy was seen in theNortheast Valley at 13.3% vacant, with a 3.7% decreasefrom last year. Vacancy rates are dropping slowly aroundthe valley even as significant construction goes forward.Meanwhile, rental rates throughout the Phoenix markethave remained relatively stable. Average direct rental ratescontinue to hover around $19.75 per square foot annually,on a full service basis.

Currently just over 900,000 square feet of office space isconstruction. Among the developments currently underwayis the 168,000 square foot Phoenix Bioscience Center,which should be completed by October 2004. There isalso an additional two million square feet of office space inthe planning stages. All of this speculative building suggestsrenewed confidence in the office market, but it will alsoensure that relatively high vacancy rates will continue atleast into the near future. However, Phoenix’s explosivepopulation growth, combined with the overall economicrecovery should ensure continued occupancy growththroughout the coming year.


1999 194,280,000 9,447,000 6,918,000 8.2 5.702000 199,989,000 5,709,000 5,069,000 8.3 4.002001 206,166,000 6,177,000 2,491,000 10.1 4.802002 211,416,000 5,250,000 1,338,000 12.1 5.402003 214,316,000 2,900,000 215,000 13.2 5.90

William C. Saul

2390 E. Camelback Road, Suite 100Phoenix,AZ 85016Tel 602-222-5000Fax 602-222-5001/602-222-5003


1999 18,745,000 399,000 -128,000 9.2 29.402000 18,759,000 14,000 -185,000 10.5 22.002001 19,885,000 1,126,000 -115,000 17.0 21.802002 19,885,000 0 -449,000 22.3 18.402003 20,010,000 125,000 -109,000 19.0 17.50

Downtown Office


1999 61,221,000 5,630,000 2,392,000 11.3 27.902000 64,775,000 3,554,000 3,920,000 10.1 24.002001 70,176,000 5,401,000 1,785,000 16.9 24.002002 73,248,000 3,072,000 1,457,000 17.9 20.902003 74,933,000 1,685,000 2,618,000 16.1 20.10

Suburban Office

Industrial

Office IndustrialOverall vacancy within the Phoenix Metropolitan industrialmarket crept up slightly in 2003, from 12.1% at the close of2002 to today’s rate of 13.2%. Despite this increase, netabsorption for the year was a positive 215,000 square feet,far outperforming 2002’s negative absorption of over120,000 square feet. The increase in vacancy comes aboutprimarily due to new construction. Roughly three millionsquare feet of new product was brought to market in 2003.While this marks a significant reduction from the 4.6 million square feet of industrial space that was delivered in 2002, it still significantly outpaced occupancy growth.One good sign is that reductions in new industrial development continue and as of the close of the year only1.5 million square feet of space was under construction,with most of that build-to-suit properties. The slowdownin construction activity should translate into furtherabsorption of existing vacant space.

There are other positives that should translate into 2004being a year of growth for the local market. Leasing activityis on an upward trend. The market finished strong in thefourth quarter, recording nearly 750,000 square feet ofabsorption and bringing the market out of a deficit of over half a million square feet.

Interest and activity continue at heightened levels thanks in large measure to Phoenix’s continued strong populationand employment growth. At the close of the year Arizona’sjobless rate had dropped to 4.8%, while the Phoenix-MesaMSA saw unemployment decrease to just 4.1%. Job creationultimately leads to demand for space and, as such, futureprospects for the Phoenix industrial market appear to be in line with the recent past. Meanwhile, the market continues to have a relatively low percentage of speculativeconstruction which will help the market to absorb currentlyvacant space.

60

The Pittsburgh office market continued to strugglethroughout 2003. Vacancy remained high, leasing volumelow and the market, in general, in the doldrums. Yet, thereare signs that conditions are improving. The sublease overhang is finally shrinking, due both to lease expirationsand a number of successful sublease transactions.While tenant interest seemed to increase during the fourthquarter, this did not translate into signed deals. In fact,no major office lease transactions occurred in the fourthquarter. Yet, there are finally some deals in the pipeline thatshould translate into higher occupancy levels by the secondquarter of 2004. The amount of tenants actively seekingspace seems to be up from this same time last year, with at least one major tenant in the market for over 100,000square feet. However, it is still unlikely that the currentlevel of activity will have a significant impact on lease rates.

The CBD office market continues to be very weak.Very little activity is present in the CBD and some lease rates remain in the single digits for quality space.Landlords are continuing to offer substantial incentives totenants in order to conclude lease transactions. At leastthe suburban markets, while experiencing extremely highvacancy rates, seem to be showing some signs of life.A number of lease transactions at Southpointe, ParkwayWest and Cranberry recently closed and could signal apotential turn-around. New construction remains a non-factor with very little speculative development underway. Look for activity to pick up as 2004 progresses,however, full recovery will likely not happen anytime priorto 2005.


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 75,568,000 N/A N/A N/A N/A2002 76,425,000 857,000 699,000 17.9 4.002003 76,916,000 491,000 1,299,000 16.7 3.90

Robert Cornell, SIOR

Suite 1800 Benedum Trees Building223 Fourth AvenuePittsburgh, PA 15222Tel 412-391-3500Fax 412-391-3511


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 29,550,000 0 N/A N/A N/A2002 29,550,000 0 -514,000 13.8 21.102003 29,550,000 0 -179,000 18.0 21.60

PITT

SBUR

GH

,PA

Downtown Office


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 19,300,000 0 N/A N/A N/A2002 19,500,000 200,000 -352,000 22.7 18.202003 19,560,000 60,000 -4,000 21.3 18.20

Suburban Office

Industrial

Office IndustrialThe Pittsburgh industrial market remained soft as of theclose of the year. For the most part, favorable market conditions have not motivated tenants and buyers in themarketplace and activity remained subdued through most of2003. However, by the close of the year, there were somepromising signs. Overall occupancy rates stopped theirfreefall and by the fourth quarter vacancy was stabilizing. Rental rates in the market also seem to havestabilized and are strengthening as market activity pickedup, particularly in the North and West submarkets.While these conditions should continue into the first partof 2004, they may be tempered by the City of Pittsburgh’srecent financial woes. This could affect industrial growthwithin the city limits, although it is unclear how much thiswould impact Pittsburgh’s suburban industrial markets.

Construction on Aldi Foods distribution center has startedin the North submarket and expected completion of the400,000 square foot facility is early 2004. This project islocated in a Keystone Opportunity Zone, which offers nostate or local taxes until 2013. Meanwhile, Beaver Countypurchased the million square foot LTV Tin Mill in the West submarket for what promises to be a challengingbrownfield development project. Burdened with an abundance of outdated buildings, the continuing trend ofrevitalizing properties in Pittsburgh and along the rivers is expected. Look for the market to continue to stabilizethrough the first part of 2004, gaining strength towards the end of the year.

61

PORT

LAN

D,O

R

As 2003 drew to a close, the Portland office market wasclearly in a state of transition. Yet, as the year drew to aclose it appeared that the market had finally hit bottom.Buoyed by more favorable conditions, tenants beganreturning to the marketplace. Leasing volume increased as vacancy began to post decreases. New developmentdeclined significantly, giving the market the ability to absorbalready vacant space. The market recorded positive netabsorption over the last half of the year and rental ratesbegan to stabilize. These indicators, combined with strongnational economic growth during the third and fourth quarters all bode well for the Portland office market.Yet, questions remain. How long will it be until the overallrebound of the economy impact the local office market?

As of the close of the year vacancy within the Portlandoffice market dipped from the 16.2% mark recorded at the end of September to today’s rate of 16.0%. While thisdecrease is slight, it does indicate a continuing trend of decreasing vacancies over the last half of 2003.The Portland office market recorded over 345,000 squarefeet of positive net absorption during the final quarter ofthe year. However, this strong performance plus the moremodest gains recorded in the third quarter was not quiteenough to record positive absorption for the entire year.Throughout the course of 2003, the Portland metropolitanarea recorded negative net absorption of roughly 140,000square feet. Expect the overall market to continue to postmodest decreases in vacancy as well as growth in overalloccupancy through the first half of the year. Look for slowimprovement, with some select submarkets continuing tostruggle. 2004 will be a year of transition as the marketshifts from low to medium growth. In the meantime,expect savvy tenants to move quickly to lock in favorablelease terms while the pendulum is still skewed towards a“tenant market.” The “upgrade demand” trend will continuethrough 2004 with newer buildings benefiting as tenants inexpansion mode capitalize on current market conditions byrelocating to higher quality space at similar price points.


1999 102,496,000 2,087,000 1,683,000 8.1 4.102000 103,909,000 1,413,000 2,466,000 4.8 3.502001 104,961,000 1,052,000 -1,219,000 8.5 5.002002 105,897,000 936,000 455,000 13.4 5.002003 108,250,000 2,353,000 2,609,000 16.4 4.80

John P. Kohnstamm

601 SW Second Avenue, Suite 1500Portland, OR 97204Tel 503-223-3123Fax 503-227-2447


1999 18,245,000 0 56,000 6.3 27.302000 18,699,000 454,000 758,000 5.4 25.002001 18,769,000 70,000 -814,000 11.3 27.002002 19,537,000 768,000 -214,000 15.1 22.002003 19,725,000 188,000 212,000 12.7 21.00

Downtown Office


1999 36,962,000 464,000 243,000 10.0 21.502000 37,779,000 817,000 1,306,000 7.9 23.502001 39,133,000 1,354,000 -18,000 17.4 23.002002 39,273,000 140,000 -794,000 21.8 23.002003 40,819,000 1,546,000 -252,000 17.3 21.00

Suburban Office

Industrial

Office IndustrialThe worst is over. Vacancy within the Portland industrialmarket currently stands at 16.4%, down from the 17.8%mark recorded at the close of the third quarter of thisyear. While today's mark of 16.4% does not mark a returnto the low levels of vacancy that were recorded prior to2001, it does mark the third straight quarter of significantdeclines. It also marks the third straight quarter in whichindustrial occupancy in the Rose City posted significantgrowth. Almost 1.7 million square feet of industrial spacewas absorbed during the final three months of the year,marking the largest single quarter gain in occupancy sincethe economic downturn began in 2001. The marketabsorbed over 2.6 million square feet of space throughout2003. Demand, as measured by occupancy growth, outpacednew construction this year. This is despite the fact thatdeliveries were up significantly over the past two years andsurpassed 2.4 million square feet. For a market that beganthe year with a staggering 18.6% vacancy rate, this comesas great news. The positive performance of the Portlandindustrial market over the final three quarters of the yeardemonstrates that not only is the worst over, but the market is clearly rebounding.

This past year afforded tremendous opportunities for tenantsto negotiate low rates. Increased competition helped tolure bargain hunters back into the action while pent-updemand also helped to spur leasing activity at the close ofthe year. Going forward look for leasing activity and dealvolume to remain constant or post some positive growth.In the coming year the balance of power will begin to shiftslowly back toward a point of equilibrium. With both thebroader economy and the industrial market in recoverymode, rental rates have begun to stabilize. Vacancy willcontinue to decrease as an improving national economyand pent-up demand fuel stronger leasing activity.Minimal new construction will also play a role in decreasingvacancy, although those new buildings that do come onlinewill likely have advantages over existing stock. Look for thesestrides to bring the market closer to equilibrium by 2005.

62

Vacancy within the Raleigh/Durham office market stood at17.7% as of the close of the fourth quarter. While this rateremains virtually unchanged from the third quarter, it marksa slight increase from the 17.4% vacancy recorded at year-end 2002. The market experienced occupancy lossesof roughly 280,000 square feet throughout the year, but the good news is that demand mounted a comeback in the fourth quarter of the year with approximately 82,000square feet of positive absorption recorded. The Class Asegment was the big winner, recording over 239,000 squarefeet of absorption throughout the year, thanks to a mix ofnew requirements and upgrade demand. While 2003 willbe remembered by many in the Triangle as a year withrecord high vacancy levels and paltry net absorption, it willbe regarded by many others as the turning point in theeconomy and the beginning of a long-anticipated recoveryfor the Triangle office market. Indeed, 2003 finished with anincrease in activity and a much-improved outlook for 2004.

Downtown Raleigh and Durham have new projects underway and demand is significant that we may see additionalconstruction starts in Downtown Raleigh. On the investmentside we are seeing the return of institutional money andsuburban office product is seeing an increase in price and a lower yield. Optimism for an improved business climateis helping fuel a recovery in the local office market.The increase in demand experienced at year-end 2003 willcontinue going forward. Look for significant positive netabsorption to occur during the first quarter due to pendingtransactions and for a handful of new speculative Class Abuildings to be built in 2004. Developers behind theseprojects feel bullish in their ability to compete with theinventory of second generation spaces, especially for larger,headquarters-sized requirements. The trends referencedabove will contribute to lower vacancy rates and significantnet absorption. Also, with few exceptions, asking rentalrates over the coming year will remain stagnant and concessions are expected to remain abundant, making for another good year for tenants in the Triangle market.


1999 29,336,000 442,000 1,988,000 11.9 N/A2000 30,272,000 936,000 868,000 12.3 4.302001 33,212,000 2,940,000 101,000 21.9 4.302002 33,551,000 339,000 -464,000 26.5 4.002003 33,767,000 216,000 -106,000 27.3 3.50

John R. Kelly

3600 Glenwood Avenue, Suite 150Raleigh, NC 27612-4669Tel 919-789-4255Fax 919-789-0268


1999 2,835,000 95,000 178,000 6.8 N/A2000 2,926,000 91,000 156,000 5.1 19.002001 3,113,000 187,000 46,000 9.8 18.002002 3,172,000 59,000 30,000 8.7 18.002003 3,219,000 47,000 -3,000 10.3 18.00

RA

LEIGH

/DU

RH

AM

,NC

Downtown Office


1999 25,144,000 3,586,000 2,551,000 6.9 N/A2000 28,226,000 3,082,000 2,186,000 7.7 19.502001 31,382,000 3,156,000 -2,473,000 20.0 18.502002 32,547,000 1,165,000 -148,000 23.2 18.002003 32,944,000 397,000 179,000 21.7 18.00

Suburban Office

Industrial

Office IndustrialThe Raleigh/Durham Industrial Market has struggled to gainmomentum over the past several years due to its relianceon the tech industry and a few major employers such asIBM and Nortel that drastically reduced their local presence.The total market contains approximately 33,766,913 squarefeet of flex and warehouse space, of which approximately27.3% is currently vacant. This number has remained virtually unchanged over the past two quarters, however,there has been a large shift of available space from the sublease to the direct category. Almost 750,000 square feetof industrial subleases either expired or were bought outby landlords in the fourth quarter resulting in a largeincrease in direct space, but little overall effect on the market. Most submarkets experienced minor positiveabsorption when adjusted to include sublease vacancies.This includes the Research Triangle Submarket, which contains 45% of the total regions supply and has been most impacted by the tech slowdown in our region.But, the market continues to face significant challenges.

New construction continues to be minimal due to theextensive supply of existing vacant inventory and aggressiveterms being offered by landlords, however this decreasedlevel of development has yet to translate into lower vacancyrates. Currently only 145,000 square feet of new space isunder construction in the region. We believe the market isat or near bottom and that market conditions will begin toimprove significantly during the next 12-18 months as theoverall economy improves. However, high vacancies and a significant supply of space will result in continued downward pressure on bulk warehouse rates in the RTPsubmarket. Meanwhile, other submarkets may begin to see more rate stabilizations as additional space is absorbed.

63

REN

O,N

V

Thanks to an exceptional fourth quarter, the Reno officemarket ended 2003 in a much stronger position than anyone expected. The market finished the year with avacancy rate of 9.5%, a rate that was significantly belowmost local forecasts. The market recorded over 150,000square feet in positive net absorption over the final threemonths of the year and over 350,000 square feet of occupancy growth through all of 2003. This flurry of activity set near records for local absorption with the bulk of this demand concentrated in the Meadowood andSouth Meadows suburban submarkets. While the first halfof the year was led by larger leasing transactions, the second half saw many smaller leases consummated.There isalso an increased demand from California firms looking to escape the cost of doing business in their state.We anticipate this trend to continue in 2004 as Class Aconstruction will be confined to these two submarkets.Just over 250,000 square feet of new office space cameonline throughout 2003.

As the economy heated up, so has the Reno/Sparks officemarket. Reno closed the year with unemployment at 3.6%and experienced a 4.5% population growth rate for 2003.These were all good signs for the future of the office market. Rental growth occurred in 2003 and we expectcontinued increases in lease rates in 2004. Net absorptionfor 2003 was the second highest on record, and with continued in-migration from California as well as theimpact of the overall economy look for Reno to be well-positioned for another strong year in 2004.


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 54,346,000 2,543,000 1,526,000 8.8 3.702002 55,605,000 1,259,000 717,000 9.8 3.502003 56,491,000 886,000 269,000 10.5 3.50

Tim Ruffin, SIOR, CCIM

5345 Kietzke Lane, Suite 100Reno, NV 89511Tel 775-823-9666Fax 775-823-4699

Industrial

Office IndustrialTaking the year as a whole, statistical data demonstratingthe Reno/Sparks industrial market’s 2003 performance gives the impression the year was lackluster, to say theleast. Total market activity was again down, reaching aneleven-year low, new construction was almost non-existent,net absorption was the lowest on record and rents wereflat…at best. That’s the bad news. The good news is thatthe bad news ended in June. As though someone flipped a switch, the last six months of the year demonstrated conclusively the longest downturn in the industrial market’shistory had come to an end. Deal volume increased dramatically as the market recorded successive quarterswith activity exceeding one million square feet of product.Meanwhile, occupancy growth shot up and vacancy ratescrept downward. Developers began getting to do something that hadn’t been done significantly in Reno foryears…they began to propose speculative development.

We believe what occurred in the last half of 2003 was thetip of the iceberg. Local and state economic developmentinitiatives continue to bring new players to the Reno area.With the national economy beginning to roll and withCalifornia mired in deficits, regulatory constraints, onerouspower costs and unbearable industrial insurance premiums,the Reno/Sparks market continues to be in the crosshairsof companies from the east wanting to serve the west andfrom California companies seeking lower operating costsand a better quality of life. On the other hand, someCalifornia companies may take a “wait and see” approach to give “The Governator” a chance to lead that state to amore hospitable business climate.


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 1,648,000 0 -28,000 13.8 N/A2002 1,648,000 0 19,000 12.6 20.002003 1,648,000 0 22,000 11.3 20.50

Downtown Office


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 5,475,000 70,000 98,000 12.4 N/A2002 5,701,000 226,000 317,000 10.3 20.602003 5,935,000 234,000 238,000 9.4 20.50

Suburban Office

64

While 2003 ended in a rather lackluster fashion, the year as a whole marked a rebound from the economic doldrumsthat began in 2001.The market recorded positive netabsorption of over 2.6 million square feet of space in 2003, more than that recorded in 2001 and 2002 combined. At the same time over 3.4 million square feet of new space came online during this period, doubling the1.7 million square feet of space that came to market lastyear. So, while the market recorded negative net absorptionof over 154,000 square feet in the fourth quarter, 2003 was on the whole a very positive year for Sacramento.

Despite taking a step backwards in the fourth quarter ofthis year, the Sacramento office market remains healthy.There are no signs to indicate that the slowing activity ofthe fourth quarter is a reversal of the gains recorded in2003.The general consensus among most active brokers is that this is merely a matter of the market catching itsbreath, following three quarters in which pent-up demandhad fueled market activity as space users returned to themarketplace following a cautious 2002.We actively trackspace requirements in the marketplace and are currentlyaware of roughly 1.2 million square feet of office spacerequirements for the first half of 2004.This marks anincrease of 50% from the 800,000 square feet of requirements we recorded at the close of the third quarter.The fact is that there are deals in the pipeline andthat leasing activity over the next three months of 2004will most likely return or even surpass the levels that hadbeen recorded during the first three quarters of 2003.


1999 143,957,000 3,050,000 3,702,000 7.3 3.602000 146,364,000 2,407,000 3,794,000 6.2 4.002001 156,682,000 10,318,000 1,318,000 12.6 4.202002 158,965,000 2,283,000 -44,000 13.8 4.202003 160,375,000 1,410,000 5,865,000 10.3 3.90

Dennis F. Shorrock, SIOR

1610 Arden Way, Suite 240Sacramento, CA 95815Tel 916-929-5999

916-648-2000 - REMSFax 916-649-0001

916-648-2050 - REMS


1999 11,231,000 336,000 409,000 9.5 27.102000 11,231,000 0 150,000 6.5 28.802001 11,231,000 0 89,000 6.7 25.002002 11,381,000 150,000 -161,000 8.6 21.602003 13,111,000 1,730,000 1,534,000 8.9 29.50

SAC

RA

MEN

TO,C

A

Downtown Office


1999 42,796,000 1,348,000 1,955,000 10.2 21.602000 43,769,000 973,000 1,533,000 9.3 23.202001 45,588,000 1,819,000 1,058,000 13.3 19.602002 47,176,000 1,588,000 943,000 12.2 21.002003 48,927,000 1,751,000 1,119,000 12.1 22.50

Suburban Office

Industrial

Office IndustrialVacancy within the Sacramento industrial market currentlystands at 10.3%, down from the 11.0% mark recorded atthe close of the third quarter of this year. This marks areturn to the levels of vacancy that were recorded justprior to the impact of the most recent economic downturnin late 2001. It also marks the fifth straight quarter ofdeclines dating back to the third quarter of 2002 whenvacancy for the metropolitan area peaked at 13.6%.While vacancy has yet to have returned to the record low levels recorded during the height of the last economiccycle, it is important to note that in some ways today’s levels reflect a healthier industrial market. From 1998 to2000 vacancy hovered in the seven percent range, reachinga low of 6.8% in 1998. While those levels may sound like alandlord’s dream, they also reflect a market in which spaceusers were constricted in terms of their options and inwhich immediately available space for expansion was difficult to find. Vacancy levels within the ten percent range generally ensure enough available space for economicexpansion, but not so much as to depress rental growth.Of course, there are a number of variables that play intothis, including industrial product type and competition within submarket areas, but the overall picture forSacramento is much improved from just a year ago.

Based upon current absorption trends, and barring anyunforeseen events, it is likely that vacancy in the near future will continue to post modest decreases even as new construction begins to ramp up. An improving national economy should also be a driving force behindeven stronger leasing activity. This activity, however, willcontinue to be primarily focused on smaller structures anddivisible buildings. While the outlook is improving for bulklandlords, these properties are still not in the clear. In theimmediate future landlords of smaller buildings or divisiblemedium to large structures will continue to have the upperhand with the low vacancy rates for these types of buildingspotentially spurring asking rate increases.

65

SALT

LAK

E CIT

Y,UT

Vacancy began to edge downward during the last sixmonths of 2003, with declines registered in both direct and sublease space.A total of 497,000 square feet of directspace was absorbed over the course of the year, a notableimprovement over 2002’s negative absorption of 231,000square feet. While four new office buildings added 304,000square feet to the market in the first half of 2003, no newspace came on line during the remainder of the year.Tenants have responded to the opportunities and incentivesavailable in the marketplace, often improving the quality oftheir office space with a move from Class C to Class A and B facilities.

The job loss and downsizing which contributed to negativeabsorption in 2002 appeared to slow during the latter halfof 2003, when the CBD began registering modest but positive gains. Tenant loss continues to plague the periphery market, particularly in Class B and C buildings.The flow of sublease space coming on to the market hasdiminished and sublease vacancy made a steady decline in 2003. Sublease opportunities continue to provide anattractive alternative to tenants in search of below marketrental rates and concessions. Close to one million squarefeet of new construction was implemented by owner/usersin 2003, with the majority undertaken by companies associated with the medical industry. The decline in totalmarket vacancy would have been much more significant had these tenants opted to lease existing space.


1999 92,998,000 3,410,000 4,994,000 7.4 4.702000 95,372,000 2,374,000 2,210,000 7.4 4.302001 96,731,000 1,359,000 -1,518,000 10.2 4.102002 96,899,000 168,000 1,594,000 9.0 3.402003 97,650,000 751,000 -864,000 10.5 3.80

William L. D’Evelyn

175 East 400 South, Suite 700Salt Lake City, UT 84111Tel 801-322-2000Fax 801-322-2040


1999 9,936,000 23,000 109,000 9.4 24.002000 9,936,000 0 45,000 8.7 21.902001 9,936,000 0 339,000 10.5 22.502002 9,936,000 0 -370,000 12.9 22.202003 9,936,000 0 85,000 12.0 22.20

Downtown Office


1999 14,911,000 1,004,000 681,000 9.0 24.002000 16,516,000 1,605,000 1,414,000 9.6 20.502001 17,990,000 1,474,000 623,000 15.6 20.102002 18,409,000 419,000 -26,000 17.9 19.902003 18,678,000 269,000 425,000 16.9 19.60

Suburban Office

Industrial

Office IndustrialIndustrial market activity showed considerable improvementin 2003. Leasing and sales activity in most market segmentsattained the highest levels in five years. These gains werecountered, however, by a marked slowdown in activity inbuildings 20,000 to 50,000 square feet in size. Closures byCertain large national tenants triggered an increase in totalindustrial vacancy. Although gains in market activity workedto chisel down vacancy levels over the course of the year,facilities closed by just two industrial tenants—FlemingFoods and Southwire Corporation—returned 871,000square feet to the marketplace. These closures were theprimary source of a 1.5% increase in overall vacancy.

Expansions by local and national tenants are fueling marketactivity. Tenants are exhibiting optimism in the local economy and taking advantage of opportunities in the marketplace to grow their businesses. This trend reflects a significant advance over last year, when activity was dominated by tenant relocations, particularly those made in pursuit of space upgrades at more competitive rates.Lease rates have stabilized and are showing signs of recovery. The market has regained roughly half of the average 20% drop in rents that occurred in 2000, but has yet to see a return to the rents attained in 2001.

66

In the fourth quarter of 2003, net leasing activity continuedsolid, absorbing 421,000 square feet. In 2003 the markethas absorbed approximately 751,000 square feet.The direct vacancy rate currently stands at 8.9%, continuingits decline from highs seen in 2002. Factoring in vacantsublease space, the combined market vacancy rate isapproximately 11.2% throughout the market. Constructionremains restrained; developers continue to seek significanttenant commitments prior to breaking ground. In 2004,speculative development will begin in submarkets wheretenant demand is strong and few options for large usersexist. However, most development in 2003 has focused on build-to-suit properties. Owner/user purchases remainstrong, thanks to low interest rates, although activity hasbeen hampered by a lack of available properties.

After several quarters of stagnant net absorption, manysubmarkets ended 2003 with positive absorption anddeclining vacancy rates. If these trends continue, we should begin seeing new construction in the near future.The Downtown, Carmel Valley and Carlsbad submarketshave new projects set to begin in 2004. Direct vacancyrates in several of San Diego County’s larger office submarkets continue to decline from the double-digit highsof 2001. Many markets are seeing a rise in tenant interest.All factors considered, the outlook for San Diego’s officemarket is very promising. Over the next 20 years,San Diego’s projected population growth is nearly 45%.This increase will primarily be composed of highlyeducated, well-trained individuals, providing an excellentemployment base for corporate users.With its diverseeconomy, San Diego will continue to be one of thestrongest and most appealing markets in the nation.


1999 N/A N/A N/A N/A N/A2000 N/A N/A N/A N/A N/A2001 174,076,000 3,026,000 2,446,000 7.8 7.202002 175,693,000 1,617,000 213,000 9.1 6.502003 177,709,000 2,016,000 684,000 9.8 7.60

James J. Zimsky

4660 La Jolla Village Drive, Suite 200San Diego, CA 92122Tel 858-455-1515Fax 858-546-9146


1999 N/A N/A N/A N/A 25.802000 N/A N/A N/A N/A N/A2001 9,324,000 0 178,000 7.6 28.402002 9,324,000 0 -171,000 10.1 27.202003 9,324,000 0 -6,000 10.2 29.10

SAN

DIEG

O,C

A

Downtown Office


1999 N/A N/A N/A N/A 27.002000 N/A N/A N/A N/A N/A2001 53,597,000 1,539,000 -385,000 10.1 23.602002 54,924,000 1,327,000 -1,900,000 12.8 22.502003 55,478,000 554,000 757,000 11.3 29.40

Suburban Office

Industrial

Office IndustrialVacancy within the San Diego County industrial marketdecreased fractionally to 6.8% at the end of 2003.Taking into account vacant sublease space, the combinedvacancy rate stands at roughly 9.8%. Vacancy within most submarkets remains in the 5.0% to 8.0% range.Net absorption in the fourth quarter was solid, and helpedpropel the County to positive absorption for the year.Throughout the San Diego industrial market just over777,000 square feet of space was absorbed during the finalthree months of the year. This brought the market out ofthe red for the year, with an overall growth in occupancy of over 680,000 square feet for 2003. Year-to-date, theCentral County Region remains the strongest performingsubmarket with over 372,000 square feet of positiveabsorption for the year. The I-15 Corridor Region absorbedover 155,000 square feet, and the North County Regionover 150,000 square feet.

New construction remains limited due to moderate tenantdemand. Of the 2.1 million square feet currently underconstruction, approximately 60% is pre-leased. Factoring inproduct currently under construction with vacancy upondelivery, the total market vacancy rate may be as high as10.16%. However, with more leasing activity in the dealpipeline, it is believed that vacancy will show only minorincreases, if any, once these projects are delivered to the marketplace. Meanwhile, average asking rates haveessentially remained the same. Landlords continue rentalconcessions for credit worthy tenants. High-tech and R&Dasking lease rates have been averaging $1.34 per squarefoot per month on a triple net basis, unchanged from theend of the third quarter. General warehouse/multi-tenantlease rates average $.73 per square foot per month on atriple net basis, and are also virtually unchanged from theend of the third quarter.

67

SAN

FRA

NC

ISCO

,CA

Decimated by the dot-com implosion three years ago andprolonged by the ensuing recession, the San Franciscooffice market finally emerged out of the storm and lookspoised for a promising and steady recovery. Fourth quarter’sstrong absorption of over 360,000 square feet marks thesecond consecutive quarter of net absorption and raisedthe year’s tally to nearly 140,000 square feet of product,marking the first time since 2000 that the office market finished with positive absorption. 2003’s second half surgehas finally produced vacancy rates trending in the rightdirection – downward. The vacancy rate declined from17.3% to 16.9% during the fourth quarter as most activitytook place in the Financial District. Taking advantage ofinexpensive rents and superior location, the flight to qualityspace trend continued in the Financial District as nearlythree quarters of all fourth quarter transactions were completed here, parlaying into almost 210,000 square feet of positive net absorption.

Rental rates have stabilized as owners approached theirbottom line to do profitable deals and haven’t droppedrates much over the course of the year. Average FinancialDistrict Class A rents decreased only 2.7% from the 1stquarter and now stand at $29.31 per square feet yearly, ona full service basis. During the same time frame, Class Acitywide rents decreased 2.2% to $29.13, Class B increased3.7% to $21.68 and Class C rents decreased 3.5% to$16.65. With vacancy dropping and rents stabilizing, it’sclear that the bottom has been struck and the city shouldexperience a continued rebound into 2004. The recoverywill be slow however, as economists are predicting modestjob growth of 1.0% to 2.0% for 2004. Job growth seems tolag behind the overall economy by 12-18 months so a realpickup could occur in 2005. With estimated absorption ofone million square feet for 2004 and possibly up to twomillion square feet for 2005, it is estimated that the vacancyrate could dip below 13% citywide in the next two years.


1999 44,181,000 100,000 297,000 1.8 9.602000 44,162,000 -19,000 682,000 2.5 31.202001 44,162,000 0 -3,333,000 9.8 10.102002 44,202,000 40,000 -1,877,000 11.6 10.002003 44,202,000 0 436,000 10.6 8.60

Scott Harper

Two Embarcadero Center, Suite 1000San Francisco, CA 94111Tel 415-788-3100Fax 415-433-7844


1999 71,865,000 525,000 2,634,000 2.6 45.102000 74,799,000 2,934,000 3,093,000 3.6 78.102001 76,972,000 2,173,000 -5,011,000 13.5 40.902002 79,315,000 2,343,000 -1,137,000 16.9 32.002003 79,540,000 225,000 138,000 16.9 29.10

Downtown Office


1999 26,902,000 1,704,000 1,455,000 4.6 49.002000 28,302,000 1,400,000 2,007,000 2.8 78.002001 29,526,000 1,224,000 -4,444,000 22.4 37.002002 30,409,000 883,000 -1,266,000 28.3 28.402003 30,409,000 0 189,000 27.9 24.70

Suburban Office

Industrial

Office IndustrialSan Francisco – San Mateo

The San Mateo County industrial market continues toshow signs of recovery. While vacancy and rental rateshave stabilized, leasing activity has risen. Leasing activitycontinues to increase with industrial business on thePeninsula picking up. Increases in trade and distributionindustries, as well as a resurgence in biotechnology havefueled local demand, particularly over the last half of 2003.However, sublease space remains a factor. As such, look forrental rates to remain flat in the near future. For the pasttwo years, investment sales have also been strong and while demand remains firmly in place, the amount of spaceoffered for sale has decreased. As 2003 came to an end itwas apparent that the San Mateo County industrial marketwas finally firming up.

As the industrial leasing market continues to firm up,the vacancy rate will continue to drop through 2003.Most deals on the Peninsula continue to consist of smallerrequirements. As consumer confidence increases, we willsee the demand for larger square foot spaces increase.One market factor that has remained constant is thedemand for industrial purchases.The demand for industrialpurchases held steady while prices and values of propertiescontinued to soften; many user/owners remained in themarket to take advantage of low interest rates and slightlymore favorable prices. However, the limiting factor to thismarket is the small supply of industrial properties beingoffered to the marketplace

68

Vacancy decreased within the Downtown San Jose/SiliconValley office market from 21.1% in October to today’s rateof 20.3%. San Jose’s suburban submarkets recorded anincrease from 15.1% to 17.3% vacancy during the sametime. While the CBD benefited from Adobe Systems occupying its new 11-story, 275,000 square foot Class Aoffice building, the suburbs were hit with occupancy lossesof over 1.1 million square feet. Despite this, there were anumber of major lease transactions at the end of the year,including two major deals in the suburban office marketinvolving Silicon Graphics’ leasing of two 4-story Class Aoffices buildings of roughly 130,000 square feet each.

As 2003 drew to a close tenant interest seemed to begaining. But it may be premature to say that the SanJose/Silicon Valley market has stabilized. Look for that tooccur early in 2004, with modest growth following as themarket begins a protracted period of recovery. Until thentenants will continue to have the upper hand and landlordswill need to be flexible in order to attract and retain quality space users.


1999 237,934,000 252,600 4,679,560 4.2 10.502000 242,922,000 4,988,000 11,230,000 1.3 8.402001 251,493,000 8,571,000 -7,312,000 7.6 8.402002 253,823,000 2,330,000 -8,607,000 11.7 4.302003 253,845,000 22,000 -12,987,000 16.8 5.50

Michael J. Burke

450 W. Santa Clara StreetSan Jose, CA 95113Tel 408-282-3800Fax 408-292-8100


1999 N/A N/A N/A N/A 45.102000 6,174,000 0 260,000 1.2 60.002001 6,516,000 342,000 -151,000 8.7 57.102002 6,516,000 0 -292,000 13.2 39.302003 7,172,000 656,000 -77,000 20.3 32.70

SAN

JOSE/SILIC

ON

VALLEY,C

A

Downtown Office


1999 42,052,000 1,704,000 1,455,000 4.6 42.402000 44,075,000 2,023,000 2,559,000 1.9 84.002001 47,567,000 3,492,000 -171,000 10.7 42.202002 49,499,000 1,932,000 216,000 13.1 29.202003 49,808,000 309,000 -2,389,000 17.3 25.90

Suburban Office

Industrial

Office IndustrialVacancy within the San Jose/Silicon Valley industrial marketstood at 16.8% as of the close of the year, up from 15.2% inthe third quarter. The market recorded occupancy loss ofnearly four million square feet of space during the last threemonths of the year. As a whole the market recorded nearly13 million square feet of negative net absorption throughoutthe past year. In the face of these challenges quoted annualrents continue to go downward.

Despite a difficult year, there were a few positives as theyear came to a close. Leasing activity for the Silicon Valleyindustrial market in 2003 yielded a considerable number of transactions over 50,000 square feet, particularly in thefourth quarter. The vast majority of these deals were forTech/R&D space, with Bulk Warehouse and Warehouse/Distribution transactions splitting the difference. All threeindustrial product types recorded an increase in grossabsorption from the previous quarter as leasing activitypicked up at year’s end. Unfortunately, this has not yettranslated into decreased vacancy or positive occupancygrowth. But the market is at or near bottom. Look fortenants to continue to hold the cards through early 2004,but also for the market to begin to post growth as overalleconomic conditions brighten.

69

SEATT

LE,WA

It is likely 2003 will be remembered as the year the PugetSound office market reached bottom and began the slowbut steady turn out of the millennium doldrums. At year’send, the overall vacancy rate for the Puget Sound officemarket rose slightly above where it was at the close of 2002. Yet, despite this, some property types and submarkets have performed fairly well over the past twelvemonths. Leading the way has been the overall Class A market, which performed well throughout the year withconsistently decreasing vacancy and over 600,000 squarefeet of positive absorption. Most of this occupancy growthoccurred in the larger downtown Seattle and Eastside markets. Vacancy rate fluctuations have been minimalthroughout the year in all markets with the exception ofSouth King County. The market as a whole is inching a bitcloser to a supply and demand and landlord/tenant leverageequilibrium. Meanwhile, South King County will continueto feel the effects of a decreased Boeing presence with amuch slower turnaround than the rest of the area.

There are a number of reasons to expect the Seattle office market to turn upwards in 2004. Overall economicrecovery should begin to translate into some local jobgrowth. Meanwhile, new speculative construction remainsminimal. Of the 600,000 square feet of office space currently under construction roughly 75% already has tenant commitments in place. Another positive sign for the market is the fact that of the government is leadingthe new construction charge with 140,000 square feet ofbuild-to-suit office under construction in south Seattle forthe recently formed Department of Homeland Security.Look for 2004 to be a year of gradual improvement.Vacancy rates continue to drop, but at a moderate pace.

Office IndustrialIt has been a mixed year for the Seattle industrial market.The market recorded two quarters of positive absorptionand two quarters of negative absorption that ultimatelyended in negative growth for the year as a whole. Despitethis, the year did end on some positive notes. Boeing’sdecision to assemble the 7E7 Dreamliner in Everett bodeswell for Snohomish County. Meanwhile, industrial invest-ment sales continue to be strong and all submarkets exceptClose-In Seattle recorded positive absorption in the fourthquarter. Construction activity picked up towards the endof 2003 and of the roughly 880,000 square feet of industrialspace under construction in the Puget Sound, over 80% isbeing built in Pierce County. As build-able industrial landbecomes increasingly scarce in the Kent Valley, PierceCounty has become the most viable local option. TheClose-In Seattle market continues to shrink due to transitdevelopment and office redevelopment.

On the investment front the market continues its discrepancyin buyer/sellers values. Local owners are selling off theirportfolios at top dollar with private investors reluctant tojump on these prices. AMB bought the multi-buildingInternational Airport Center in SeaTac as part of a nationalportfolio purchase of 37 airfreight buildings next to seveninternational airports throughout the Country. Institutionalbuyers are believers in the market strength and continue tobe aggressive. We expect 2004 to be a transitional year forthe market as recovery begins to take hold and the marketbegins to record growth by year-end.


1999 189,780,000 1,483,000 606,923 4.7 4.402000 191,224,000 1,444,000 643,000 4.2 4.102001 194,334,000 3,110,000 -4,646,000 8.6 5.002002 195,483,000 1,149,000 -2,380,000 10.4 5.002003 196,331,000 848,000 -1,057,000 11.1 5.00

Rob Aigner

601 Union Street, Suite 5300Seattle,WA 98101-4045Tel 206-223-0866Fax 206-223-1427


1999 31,109,000 808,000 736,000 2.5 36.002000 32,628,000 1,519,000 1,829,000 2.1 42.002001 34,554,000 1,926,000 -1,405,000 12.6 30.802002 35,407,000 853,000 -45,000 14.6 27.702003 36,255,000 848,000 361,000 15.3 25.90

Downtown Office


1999 44,401,000 2,627,000 2,088,000 3.8 22.002000 44,682,000 281,000 918,000 9.1 22.502001 47,955,000 3,273,000 -1,222,000 15.7 22.602002 49,048,000 1,093,000 166,000 17.5 23.002003 49,258,000 210,000 -90,000 17.6 22.90

Suburban Office

Industrial

70

The St. Louis metropolitan area’s office market registered amodest recovery in 2003. Absorption was a slightly positive46,000 square feet, after recording negative absorption in2002. However, only one office market in the regionrecorded a significant gain in occupancy. Absorption in St. Charles County totaled 748,000 square feet.New construction added one million square feet to theinventory in 2003, with St. Charles County accounting for 615,000 square feet of the total and CitiMortgage representing the majority of growth. Five other buildingsof 12,000 to 35,000 square feet made up the balance.Magellan Health’s 230,000 square foot headquarters inRiverport was the only other office building over 100,000square feet completed in 2003.

Class A absorption was 276,000 square feet. Again St.Charles County took claim to the increase; Class A absorption in St. Charles County was 756,000 square feetfor the year, meaning the balance of the region’s Class Aabsorption was negative 480,000 square feet. Class Babsorption recorded losses in each of the year’s four quarters and was negative 230,000 square feet for the year.The region’s vacancy rate increased nearly two percent,from 15.5% to 17.2%. Class A vacancy increased to 16.2%from 14.4%, and Class B vacancy increased nearly twopoints, from 17.5% to 19.2%. Sublease space decreased to end the year with 1,177,000 square feet, down from1,377,000 square feet when the year began. Most of thespace, 858,000 square feet, is in Class A buildings. A highpercentage of the remaining subleases will be expiring over the next 18 to 24 months.


1999 206,632,000 4,800,000 3,022,000 3.0 4.252000 209,596,000 2,964,000 1,055,000 3.8 5.002001 213,074,000 3,478,000 -2,815,000 6.7 4.002002 215,147,000 2,073,000 354,000 7.5 3.302003 215,950,000 803,000 1,022,000 7.3 3.50

David A. Morris, CCIM, SIOR

7701 Forsyth Blvd., Suite 500St. Louis, MO 63105Tel 314-862-7100Fax 314-862-1648


1999 12,310,000 165,000 153,000 15.0 18.502000 12,355,000 45,000 236,000 13.7 20.002001 12,355,000 0 -241,000 15.6 19.502002 12,414,000 59,000 -504,000 20.1 18.802003 12,414,000 0 -305,000 22.5 18.80

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1999 29,431,000 2,039,000 1,603,000 6.6 26.302000 31,129,000 1,698,000 1,330,000 7.4 25.502001 33,830,000 2,701,000 834,000 12.3 24.502002 34,800,000 970,000 308,000 13.9 24.502003 35,852,000 1,052,000 351,000 15.4 23.50

Suburban Office

Industrial

Office IndustrialOccupancy in industrial space on the Missouri side of theSt. Louis metropolitan area recorded its largest increase infour years. Absorption was just over one million squarefeet in 2003. Roughly 60% of this absorption occurred inbulk buildings, many of which had been available for severalquarters. Over 900,000 square feet of new constructionwere completed on the Missouri side in 2003; the vacancyrate fell slightly, from 7.5% to 7.3%. Speculative constructionaccounted for 365,000 square feet. Most of the new construction was in 14 office/warehouse buildings with atotal of 583,000 square feet. Six service center buildingsadded 211,000 square feet. Buildings under construction at year-end totaled 540,000 square feet.

Construction on the Illinois side totaled 1,342,000 squarefeet, including the 1,262,000 square foot UniLever DistributionCenter. The UniLever building joined facilities built for Dial,Lanter and Procter & Gamble at the Gateway CommerceCenter in Madison County. Begun in 1998, GatewayCommerce Center comprised nearly five million squarefeet of bulk warehouse space by year-end. Another 1.1 million square feet are under construction for HersheyFoods. Buske has a 420,000 square foot bulk distributionbuilding under construction, and Tri-Star BusinessCommunities has announced plans to build a 500,000square foot speculative bulk warehouse, the first building to be built speculatively in Gateway Commerce Center.Gateway Commerce Center attracts large users with incentives offered by the State of Illinois and local jurisdictions, as well as land made increasingly accessibledue to recent interstate highway completions.Incentives offered in and around Gateway CommerceCenter reduce building lease rates by sixty cents to a dollar per square foot.

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Tampa Bay’s office market appears to have reached bottomduring the summer of 2003. Although leasing picked upduring the third and fourth quarters, it was not enough tomake up for the negative absorption and leasing inactivityexperienced during the first quarter. As a result,TampaBay’s office market ended the year with more than 100,000square feet of negative absorption, a level it has not seensince 2000. The 2003 figures look brighter if you discountthe 800,000 square feet of office space left vacant by MCI WorldCom early in the year. This one massive hiteffectively put the market in the red for the year, despitethe fact that leasing activity was solid over the last half of 2003.

As the U.S. economy heads toward recovery, several factors are responsible for the optimistic outlook: gradualjob growth, increased consumer confidence and the lowestinterest rates in more than 40 years.

Nationwide, the jobless rate remains below 6%, its lowestlevel since June 2003. Meanwhile the number of Tampa Bay’sunemployed has shrunk to 4%. Employed and confident,consumers have helped turn around the American economy. A leading economic indicator, the gross domesticproduct saw an 8.2% surge in economic activity in the thirdquarter, making it the fastest rate of GDP growth in nearly20 years.Analysts predict a 4.8% increase in GDP during2004, a solid foundation for a strong rebound. All thesefactors will help Tampa Bay’s office market during the next few years.With lower rent than most of the largermetropolitan markets, an economy as diverse as it isresilient and a workforce that is growing in size andstature,Tampa Bay is well positioned to emerge from therecession as a strong contender in this new economy.As economists predict a strong year, it is likely that officeleases and sales will begin to gather steam during the first quarter and will remain vibrant throughout 2004.Concessions, which drove many long-term leases andexpansions in 2003, should begin to decrease by year-end.


1999 168,100,000 709,000 -290,000 5.0 4.252000 169,322,000 1,222,000 352,000 5.7 5.802001 169,755,000 433,000 84,000 6.9 5.102002 170,207,000 452,000 505,000 7.0 4.802003 172,018,000 1,811,000 2,390,000 7.5 4.30

J. Patrick Duffy, MCR

4350 West Cypress Street, Suite 300Tampa, FL 33607Tel 813-221-2290Fax 813-224-9403


1999 7,854,000 0 94,000 11.5 19.502000 7,854,000 0 -53,000 11.6 19.702001 7,854,000 0 -154,000 14.9 19.702002 7,854,000 0 -214,000 17.2 19.302003 7,854,000 0 202,000 17.3 20.30

Downtown Office


1999 61,092,000 2,810,000 2,506,000 8.4 20.002000 62,449,000 1,357,000 1,064,000 10.2 19.802001 64,055,000 1,606,000 297,000 14.0 20.602002 64,223,000 168,000 56,000 13.3 21.502003 64,747,000 524,000 580,000 12.6 20.00

Suburban Office

Industrial

Office IndustrialBy year-end 2003, 11.6 million square feet, or 8.7% of the Tampa metropolitan area’s industrial space sat vacant.Roughly 1.8 million square feet of product had beenabsorbed by year-end—more than the three previous yearscombined. Average industrial gross rents have remained flatsince 2000 when they averaged $4.75 annually per squarefoot. Gross rents, meanwhile, ended 2003 at $4.99 annuallyper square foot. Looking at the three major product typeswithin the Tampa market; flex/service, manufacturing anddistribution/warehouse, only flex/service experienced a significant jump in price between 2000 and 2003.

Otherwise, rental growth has been remarkably stable locallyeven as other national markets have experienced significantdownward pressure on lease rates. As the U.S. economyheads toward recovery, several factors have contributed to an optimistic outlook: gradual job growth, increased consumer confidence and the lowest interest rates in morethan 40 years. Nationwide, the jobless rate remains below6%, its lowest level since June 2003. Meanwhile the numberof Tampa Bay’s unemployed has shrunk to 4%.

With improvements in the economy and the emphasis onhigh-tech education, the Tampa Bay industrial market hasevery reason to be optimistic.These conditions create ascenario for increased demand for industrial space andrecent market statistics reflect that improvement. If theeconomic upturn continues, construction starts shouldbegin by third quarter. Meanwhile, though free rent andtenant improvements continue to impact new leases andrenewals, market conditions appear to be moving backtowards equilibrium. Tenants wanting landlord concessionsshould take advantage of deals now. By mid-year 2004, thiscould very likely begin turning into a landlord’s market.

72

Still one of the strongest markets in the nation,Washington, DC ended the year with mild uncertainty as demand increased dramatically while vacancy crept upsteadily. Over 3.2 million square feet delivered into themarket this year and 1.4 million square feet of that wasunleased, pushing the vacancy rate up from 4.6% at the endof 2002 to 5.8% in the fourth quarter of 2003. The markethandled the surge of supply very well, however, due to significantly inflated demand.Year-end net absorptiontotaled over 1.7 million square feet, nearly six times greater than 2002 year-end net absorption.

Although the District relied on government leasing to keepthe market afloat in 2001-2002, the private sector made aconsiderable return to the market in 2003. Firms leasingsmall blocks of space took advantage of economical sublease space resulting in a 20 basis point decrease in the sublease rate to 2.0%. Users of large blocks of spacewere prevalent in the market as well; two law firms leased nearly one million cumulative square feet and will havetheir offices set up in a campus of multiple buildings.Developers remain optimistic about the Washington, DCmarket despite increasing vacancy levels as nearly six million square feet is currently under construction withcompletion dates extending into 2006.This space is spreadamong 19 buildings in five different submarkets with pre-leasing levels reaching 50%.

Jeffrey Flynn

1717 Pennsylvania Avenue, NW, Suite 1000Washington, DC 20006Tel 202-478-2300Fax 202-204-3276


1999 93,760,000 1,401,000 1,393,000 4.8 42.002000 95,175,000 1,415,000 3,151,000 2.9 48.002001 99,131,000 3,956,000 2,536,000 5.2 49.002002 102,046,000 2,915,000 505,000 7.3 46.002003 105,267,000 3,221,000 1,915,000 7.8 41.90

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Office IndustrialThe Washington, DC industrial market, which is overwhelminglylocated in the Northern Virginia and Maryland suburbs,remained flat during 2003.Availability decreased from 11.7%to 11.2% over the year and the market absorbed 656,000square feet of space. A majority of the vacancy is located in Northern Virginia's overabundance of flex buildings –data centers built or converted during the tech boom thatnow sit vacant. Several have been re-converted to officespace by owners trying to fill their buildings in a flat market.Maryland's industrial market has been much more stable,serving the health and pharmaceutical sectors in MontgomeryCounty and the I-95 distribution corridor in PrinceGeorge's County.

Rental rates remained flat in 2003 as activity was stagnant.Apart from a handful of leases of more than 100,000 squarefeet, most deals were smaller tenants in multi-tenant buildings.2.4 million square feet of new industrial product deliveredduring 2003, most of it in build-to-suits.The outlook for2004 is more stability. The increasing interest in Frederick,MD as a warehouse and distribution center shoulddecrease vacancies in that area while the Dulles Corridorin Virginia will continue to contend with an excess supply of space.


1999 N/A N/A N/A N/A N/A2000 158,883,000 2,700,000 1,400,000 6.1 N/A2001 162,230,000 3,347,000 21,000 10.5 6.702002 163,994,000 1,764,000 -2,999,000 11.7 7.502003 166,435,000 2,441,000 656,000 11.2 7.20

Industrial

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In 2003, the Northern Virginia office market experiencedthe highest level of positive net absorption since the boomof 2000. After peaking at 19.1% in the first quarter of2003, Northern Virginia’s availability rate ended 2003 at16.1%. Contributing to this lower availability was thedecline of sublease space, which dropped to the lowestlevel since the first quarter of 2001. Sublease space, whichat one point topped eight million square feet, ended theyear at 5.4 million square feet. This will benefit landlordswho over the past two years were pressured to lowerrental rates due to competition from sublease space.This year’s decline in available space can also be attributedto the signing of large leases by government contractorsand government agencies as well as the delivery of fourbuild-to-suits, which totaled 1.3 million square feet.Even in a period of relative slowness in the NorthernVirginia office market, occupied space has remained high.In the fourth quarter of 2003, the level of occupied spacewas the highest since the fourth quarter of 2000. This showsthat overly aggressive new office development was themain cause of the spike in vacancy and availability ratesfrom the fourth quarter of 2000 through the first quarterof 2003.


1999 57,720,000 1,432,000 2,099,000 8.3 N/A2000 59,831,000 2,111,000 3,008,000 6.0 32.002001 62,561,000 2,730,000 -242,000 11.7 31.002002 64,966,000 2,405,000 313,000 15.7 28.502003 66,261,000 1,295,000 -27,000 17.3 26.50

Suburban MD Office

OfficeWashington, DC – Suburban MD

Suburban Maryland continued its streak of nine consecutiveyears of positive net absorption, albeit at a more temperedpace. Net absorption for 2003 totaled over 205,000square feet. This positive occupancy growth was driven by the delivery of pre-eased new supply for tenants such as Discovery Communications, MedImmune,AdventistHealthcare and Advancis Pharmaceuticals who togetheraccounted for nearly one million square feet of officespace. Due primarily to the relocation of these tenants totheir new spaces, the vacancy rate increased 70 basis pointsto close 2003 at 13.0%. Eight buildings totaling 1.3 millionsquare feet of new supply delivered in 2003 over 90% pre-leased. Helping to backfill the space vacated byDiscovery in the Bethesda-CBD were transactions by Fannie Mae,Aeras Foundation and Merrill Lynch.Without these transactions, which represent net growth of the Suburban Maryland tenant base, market conditionswould have further deteriorated due to the 2% increase in inventory.

Development activity, in light of limited demand and uncertain market conditions, continued on a steady pace.There are currently 14 buildings under construction totaling 1.4 million square feet, of which 58.5% has beenpre-leased. This includes build-to-suits for SAMSHA(230,000 SF), FDA (65,760 SF), Marriott (151,230 SF), andthe Bozzuto Group (70,000 SF). Surprisingly, speculativedevelopment has returned after several quarters of mainlybuild-to-suit activity—proof that investors believe a sharpimprovement in market conditions is imminent and newproduct will be well received over the coming quarters.Of the 14 buildings currently under construction, ten arespeculative projects and account for over 880,000 squarefeet of new office product. Approximately 36% of thespace in these developments has already been pre-leased.

Jeffrey Flynn

1717 Pennsylvania Avenue, NW, Suite 1000Washington, DC 20006Tel 202-478-2300Fax 202-204-3276

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1999 121,761,000 10,036,000 8,642,000 4.9 30.502000 130,039,000 8,278,000 10,212,000 3.1 35.002001 138,861,000 8,822,000 -5,479,000 14.2 34.002002 144,896,000 6,035,000 -34,000 18.2 28.002003 147,246,000 2,350,000 4,862,000 16.1 26.00

Northern VA Office

The vacancy rate in Beach County suburban marketsincreased slightly this quarter, but positive absorption givesroom for optimism. This increase is due more to leasesnot being renewed than it is to an increase in subleasespace, as the availability of sublease space has diminished by more than half of what is what last quarter. New supplytotals roughly 172,000 square feet of office space this quarter, and there is currently another 256,000 square feet of product under construction. These buildings beingconstructed are all under 40,000 square feet and are disbursed throughout the county. At the Vista CenterCorporate Park in West Palm Beach, eleven acres of landwere recently sold for development of Class A office projects. Currently just over 330,000 square feet of officeprojects are proposed for this development. Palm BeachCounty has more vacant land available than the counties to the south, which leaves a positive outlook for the futuregrowth for this county.

Palm Beach continues to draw investors. In December arecord sale took place when Phillips Point in West PalmBeach, a Class A, waterfront 420,000 square foot officeproject, sold for a rate of roughly $327 per square foot.This was the largest amount ever paid in South Florida for a major office tower. Also, an extremely significantaccomplishment for this county was the decision by theScripps Research Institute to construct a facility here.This facility will mean new 44,000 jobs within the next 15 years and should bode extremely well for both the local economy as well as the resurgent office market.

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1999 N/A N/A N/A N/A N/A2000 8,692,000 65,000 -176,000 10.4 29.902001 9,200,000 508,000 415,000 14.6 28.402002 9,200,000 0 -26,000 13.3 30.302003 9,240,000 40,000 -37,000 13.8 30.00

Downtown Office


1999 N/A N/A N/A N/A 18.402000 27,610,000 835,000 831,000 8.7 27.202001 28,223,000 613,000 -226,000 14.0 28.602002 28,363,000 140,000 -286,000 13.0 27.602003 28,802,000 439,000 421,000 12.7 27.60

Suburban Office

Office IndustrialVacancy for the West Palm Beach industrial market creptupward from 12.3% recorded in October to today’s fourthquarter total of 12.7%. New construction and continuedcontractions and relocations had a negative impact on themarket as new supply outpaced occupancy growth by a rateof over four-to-one over the final three months of the year.Despite this, the market still posted positive growth num-bers for 2003. Over 420,000 square feet of industrial spacewas absorbed throughout the West Palm Beach industrialmarket last year. Meanwhile, deals seem to be increasing inthe pipeline and all indications are that leasing activity willpick up more steam early in 2004.

The sales market remains vibrant despite the slow demandfor leasing over the last two years. As seen in other SouthFlorida industrial markets, there is not adequate product forsale to satisfy the demand to purchase, and sales priceshave escalated over the past year. Speculative constructioncontinues to follow residential growth north and west in the county. Condominium warehouse developmentgeared toward smaller users has been particularly active.Available sites between I-95 and the Florida Turnpike arebecoming increasingly scarce. This will continue to restrainnew development and be a positive factor in moving theleasing market towards equilibrium.


1999 N/A N/A N/A N/A N/A2000 42,230,000 773,000 -45,000 6.1 6.502001 42,950,000 720,000 229,000 6.1 6.802002 43,309,000 359,000 154,000 6.3 6.402003 44,323,000 1,014,000 -103,000 8.6 6.70

Industrial


6360 NW 5 Way, Suite 300Ft. Lauderdale, FL 33309-3082Tel 954-233-6000Fax 954-233-6010

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Class A Net Class A Gross Top Class A Net Top Class A Gross SalesRent Dec. 2003 Rent Dec. 2003 Rent Dec. 2003 Rent Dec. 2003 Price

Market (US$PSF/Year) (US$PSF/Year) (US$PSF/Year) (US$PSF/Year) (US$PSF) Yield (%)

Europe/Middle East/Africa

Abu Dhabi, UAE 18.23 20.10 23.84 26.18 257 7.00Amsterdam,The Netherlands 18.70 21.62 35.06 39.15 257 7.30Antwerp, Belgium 14.02 17.53 16.36 19.87 234 7.25Athens, Greece 24.54 35.30 49.09 63.46 362 9.50Belgrade, Serbia and Montenegro 30.85 36.46 33.66 39.97 234 13.00Brussels, Belgium 22.21 27.46 32.14 37.98 479 6.00Bucharest, Romania 22.44 26.65 25.24 29.45 205 12.50Budapest, Hungary 19.63 24.54 28.05 32.96 175 8.50Cape Town, South Africa 10.40 12.86 12.86 15.89 88 12.50Copenhagen, Denmark 22.79 25.83 25.95 28.98 362 6.30Dublin, Ireland 42.66 59.60 56.57 88.69 701 6.50Düsseldorf, Germany 18.37 25.38 30.85 41.16 526 5.75Frankfurt, Germany 21.74 25.60 47.68 54.70 561 5.75Geneva, Switzerland 27.79 29.81 35.58 37.68 487 5.30Hamburg, Germany 17.88 21.39 28.17 31.67 467 5.50Helsinki, Finland 32.26 36.46 37.87 42.78 526 6.25Istanbul,Turkey 13.38 21.19 20.07 29.55 139 9.50Kiev, Ukraine 30.11 41.26 35.69 47.96 195 15.00Lisbon, Portugal 28.05 31.56 34.36 39.27 409 7.25London - City, UK 62.49 82.13 80.34 105.34 927 6.25London - Docklands, UK 41.06 49.99 62.49 74.99 587 7.00London - West End, UK 89.27 116.05 111.59 144.62 1,487 6.00Madrid, Spain 34.01 38.92 38.57 44.18 614 5.75Milan, Italy 40.91 46.75 52.59 58.44 760 6.20Moscow, Russia 48.33 56.04 67.84 76.67 376 13.50Munich, Germany 19.63 N/A 44.88 N/A 409 6.00Oslo, Norway 28.55 25.06 32.03 39.69 313 6.75Paris - La Defense, France 53.76 63.11 72.46 81.81 760 7.00Paris - Central, France 63.11 72.46 67.79 80.64 993 6.20Prague, Czech Republic 23.84 33.66 27.49 44.88 292 8.75Rome, Italy 37.40 42.07 46.75 51.42 643 6.30Sofia, Bulgaria 18.23 22.44 25.24 29.45 117 14.50Stockholm, Sweden 41.31 46.47 50.35 54.22 645 6.75Stuttgart, Germany 17.11 N/A N/A N/A 321 6.00Vienna,Austria 17.53 22.44 28.05 35.06 467 5.00Warsaw, Poland 25.65 31.23 31.23 36.80 279 10.00Zurich, Switzerland 46.44 49.44 61.42 67.42 674 5.50

Latin AmericaBogotá, Colombia 11.92 13.67 15.51 17.87 73 14.40Buenos Aires,Argentina 10.97 13.90 15.49 19.63 183 6.00Caracas,Venezuela 20.07 N/A 23.42 N/A 130 15.00Lima, Peru 11.84 13.85 16.73 18.74 91 12.00Mexico City, Mexico 27.88 30.11 39.03 44.61 167 12.50Santiago, Chile 11.38 13.55 16.80 18.97 111 10.00São Paulo, Brazil 23.05 26.51 28.81 33.42 208 13.00

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Class A Net Class A Gross Top Class A Net Top Class A Gross SalesRent Dec. 2003 Rent Dec. 2003 Rent Dec. 2003 Rent Dec. 2003 Price

Market (US$PSF/Year) (US$PSF/Year) (US$PSF/Year) (US$PSF/Year) (US$PSF) Yield (%)

North AmericaAtlanta, USA 14.44 22.20 20.79 28.57 202 9.75Boston, USA 21.90 38.40 33.50 50.00 300 7.50Calgary, Canada 15.42 25.83 20.82 31.23 173 8.50Chicago, USA 17.50 32.00 27.50 42.00 180 8.25Dallas, USA 9.50 18.50 27.00 36.00 150 10.00Denver, USA 11.50 20.50 18.00 27.00 160 9.00Houston, USA 13.40 22.40 23.24 32.24 101 9.00Los Angeles, USA 10.35 24.20 32.15 46.00 250 8.20Miami, USA 17.90 29.60 30.30 42.00 157 N/AMinneapolis, USA 14.32 25.10 19.00 29.78 140 9.50Montreal, Canada 11.95 23.90 18.89 30.84 100 8.75New York - Downtown, USA 17.90 33.90 30.00 46.00 N/A N/ANew York - Midtown, USA 36.40 52.40 109.00 125.00 300 6.75Ottawa, Canada 20.59 32.92 21.59 33.92 200 7.75Philadelphia, USA 15.99 23.30 35.69 43.00 95 9.25San Francisco, USA 13.10 29.10 26.00 42.00 275 8.00San Jose - Silicon Valley, USA 22.70 32.70 25.88 35.88 265 8.00Seattle, USA 16.90 25.90 29.00 38.00 295 8.00Toronto, Canada 16.95 35.93 20.82 39.79 193 7.75Vancouver, Canada 11.57 23.90 21.59 33.92 231 7.30Washington, USA 28.90 41.90 37.00 50.00 380 8.00

Asia PacificAuckland, New Zealand 16.85 22.94 22.39 29.08 210 8.00Bangalore, India 10.24 11.29 10.77 11.82 98 9.00Beijing, China 25.81 29.71 35.10 39.00 246 10.50Chennai, India 9.72 10.77 10.51 11.29 72 12.00Delhi, India 24.95 28.89 39.40 43.34 208 10.00Guangzhou, China 16.02 20.05 18.84 22.88 166 10.33Hong Kong, China 38.15 51.32 54.53 70.34 797 3.60Jakarta, Indonesia 14.05 20.86 20.07 27.88 109 8.00Manila, Philippines 9.68 12.98 12.10 15.64 106 9.00Melbourne,Australia 20.26 26.55 31.44 38.43 269 7.50Mumbai, India 31.52 34.14 36.77 39.40 219 10.00Perth,Australia 13.97 22.36 25.15 32.49 199 9.00Seoul, Korea 21.19 29.67 28.82 38.15 N/A 9.00Shanghai, China 23.98 27.66 44.39 50.52 248 9.12Singapore 21.36 30.81 27.43 37.37 635 3.53Sydney,Australia 32.77 41.64 39.48 59.39 521 7.40Taipei,Taiwan 19.90 22.87 21.95 25.54 356 5.77Tokyo - Central Wards, Japan 81.69 105.31 119.33 157.06 1,462 4.70Wellington, New Zealand 14.48 20.57 17.34 23.43 183 8.50

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OfficeInventory – Includes all existing multi or single tenantleased and owner-occupied office properties greater than or equal to 10,000 square feet (net rentable area). In somelarger markets this minimum size threshold may vary up to 50,000 square feet. Does not include medical or government buildings.

Vacancy Rate – Percentage of total inventory physicallyvacant as at the survey date including direct vacant and sublease space.

Absorption – Net change in physically occupied spaceover a given period of time.

New Supply – Includes completed speculative and build-to-suit construction. New supply quoted on a net basis after any demolitions or conversions.

Annual Quoted Rent – Includes all costs associated withoccupying a full floor in the mid-rise portion of a Class Abuilding inclusive of taxes, insurance, maintenance, janitorialand utilities (electricity surcharges added where applicable).All office rents in this report are quoted on an annual, grossper square foot basis. Rent calculations do not include sublease space.

Cap Rate – (Or going-in cap rate) Capitalization rates inthis survey are based on multi-tenant institutional gradebuildings fully leased at market rents. Cap rates are calculated by dividing net operating income (NOI) by purchase price.

Note: SF = Square FeetPSF = Per Square FootCBD = Central Business District

IndustrialAbsorption – Net change in leased space over a givenperiod of time.

Bulk Space – 100,000 square feet or more with up to 10 percent office space, the balance being general warehouse space with 20 to 36 foot ceiling heights.All loading is dock-height.

Flex Space – Single-story buildings having 10- to 18-footceilings with both floor-height and dock-height loading.Includes wide variation in office space utilization, rangingfrom retail and personal service through distribution, lightindustrial and occasional heavy industrial use.

Inventory – Includes all existing multi or single tenantleased and owner-occupied industrial warehouse, light manufacturing, flex and R&D properties greater than orequal to 10,000 square feet.

New Construction – Includes completed speculative andbuild-to-suit construction. New construction quoted on anet basis after any demolitions or conversions.

Service Space – Single story (or mezzanine) with 10- to16-foot ceilings with frontage treatment on one side anddock-height loading or grade level roll-up doors on theother. Less than 15% office.

Tech/R&D – One- and two- story, 10- to 15-foot ceilingheights with up to 50% office/dry lab space (remainder in wet lab, workshop, storage and other support), withdock-height and floor-height loading.

Triple Net Rent – Includes rent payable to the landlordand does not include additional expenses such as taxes,insurance, maintenance, janitorial and utilities. All industrialand high-tech/ R&D rents in this report are quoted on anannual, triple net per square foot basis in U.S. dollars.

Vacancy Rate – Percentage of total inventory available(both vacant and occupied) as at the survey date includingdirect vacant and sublease space.

Warehouse – 50,000 square feet or more with up to 15percent office space, the balance being general warehousespace with 18 to 30 foot ceiling heights.All loading is dock-height.

RetailCommunity Shopping Center – Usually configured as a strip often in a straight line or “L” or “U” shape.Anchor tenant is typically a discount department store (i.e.Wal-Mart,Target), supermarket or super drug store.A community center typically offers a wider range of apparel and other soft goods than a neighborhood centerdoes.Total gross leasable area is often between 100,000 and 400,000 square feet.

Neighborhood Shopping Center – These centers aredesigned to provide convenience shopping for the day-to-dayneeds of consumers in the immediate neighborhood.Anchors are likely to be supermarkets or drugstores.Other tenants might include stores providing sundries,snacks and personal services. Generally, neighborhood centers are 30,000 – 150,000 SF in size and are configuredas strip centers without an enclosed walkway or mall area,but may possibly have a canopy to connect the storefronts.

Power Center – These centers are designed to provide tremendous selection in a particularmerchandise category at low prices.Anchors are likely to becategory killers, home improvement stores, discount department stores, warehouse clubs or off-price stores.Generally, regional centers are 250,000-600,000 SF in sizeand are configured with several freestanding (unconnected)anchors and a minimal number of small specialty tenants.

Lifestyle Center – Nonanchored open-air specialty centerwith high concentration of mall type fashion, home, restau-rant and entertainment retailers.

Premier Fashion Streetfront – Destination retail corri-dor in urban center typically occupied by fashion retailersand able to command top rents.

Rents – All retail rents in this report are quoted on anannual, triple net per square foot basis.

Note: SF = Square FeetPSF = Per Square Foot

78

Colliers International50 Milk Street, 20th FloorBoston, MA 02109 USA

Tel: (617) 722-0221Fax: (617) 722-0224colliers.com

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