C&W report: market showing signs of stabilizing.

The U.S. real estate market is showing signs of stabilizing, according to Cushman & Wakefield, the world's largest fully integrated real estate services firm. It remains to be seen, however, whether this is an indication that office markets are on the verge of a sustainable recovery or simply experiencing a lull prior to further layoff announcements in the fourth quarter.

Earlier this year, economic indicators pointed to a strong recovery in 2002. Consumer confidence was rising, job losses were slowing and the Purchasing Manager's Indices -- a measure of business confidence -- appeared to be on the rise.

"Over the summer, continued corporate scandals and the threat of conflict in the Middle East deflated any momentum gained in the first half of the year," said Maria Sicola, senior managing director, Cushman & Wakefield. Real estate indicators, typically lagging, reflected this slowdown in the third quarter statistics.

The supply side dynamic in this recession has not been overbuilding, but sublease space. In the third quarter of 2002, the amount of space available on a sublease basis declined for the first time since it started sharply rising in the fourth quarter of 2000. The total amount of sublease space available is now 122.65 million SF compared to 126.2 million SF last quarter.

Demand remains subdued, reflected in weak velocity of leasing, and continues to exacerbate the imbalance resulting in increasing vacancy rates and declining rental rates. A snapshot of key statistics reveals the current status of the national office market in comparison to last quarter and a year ago.

While the leasing market has been soft, the investment market has been strong with investor demand often outpacing supply. Interest has primarily been focused on suburban office properties and traditional CBDs such as New York, Boston and Washington, D.C. This activity has been the result of the low cost of capital and what Sicola called a "flight to hard assets" as a result of a declining and highly volatile equities market.

Forecasting in this environment is particularly problematic as there are numerous and hard to quantify extraneous variables. It appears that the worst is over in technology dependent markets. However, markets with heavy concentrations of employment in the financial sector, including New York and San Francisco, could be impacted by an additional decline in corporate profits.

Looking ahead, the slumping financial markets, continuing tension in the Middle East, and the possibility and severity of any fourth quarter layoffs will all play a major role in the degree of any potential market rebound into next year. If the employment outlook remains positive for 2003, it is conceivable strong leasing activity could return by the middle of next year with modest rent growth occurring in the latter half.

Cushman & Wakefield expects that leasing activity will remain weak in the fourth quarter, and some additional space will be returned to markets like New York on either a direct or sublease basis. Downward pressure is expected to continue on rents. Investment sales activity should remain brisk and more transactions should close by year-end including several pending New York deals such as 685 Third Avenue and 1177 Avenue of the Americas.