Europe showing signs of recovery.

Europe's major office markets are, to varying degrees, still feeling the effects of the global economic downturn, with technology and financial services being hit especially hard. According to Insignia's Midyear 2002 "i on the Market" report, however, many European office markets are showing signs of recovery after a disappointing end to 2001.

According to Robert Riley, managing director of international business at Insignia, "Whereas markets such as Paris and Brussels have recovered quickly, weak demand and increasing availability continue to be the trend in London, Dublin, Frankfurt, Amsterdam and Madrid. In all but a few select markets across Europe, including Milan, prime rents have continued to fall, and further declines are expected for the remainder of 2002."

Paris activity, according to midyear 2002 "i on the Market" report:

The Paris region office market has seen a distinct upturn in recent months, culminating in a 60% quarter-on-quarter growth in leasing activity. After a strong second quarter compensated for a weak start to the year, leasing for the first half of 2002 reached 8.41 million SF, a 13% increase from the second half of 2001 but significantly below the activity recorded in the first half of 2001.

Office availability in the Paris region continues to rise. More than 21 million SF, or 4.6% of total inventory, was available at midyear, up from 3.5% at the end of 2001. The result is a better balance between supply and demand, which should support prime rents at their current level for the remainder of 2002.

Central London activity, according to midyear 2002 "i on the Market" report:

Central London saw a 20% quarter-on-quarter increase in leasing in the second quarter, bringing total activity for the first half of 2002 to 4.73 million SF, comparable to the second half of last year but well below the level of demand over the first half of 2001. Almost 70% of the office space leased in 2002 has been older space.

Availability across Central London continues to increase, reaching 6.5% at the first quarter's close and 7.5% at midyear. Available supply totals 16.8 million SF, of which the vast majority is older space. Prime West End rents have remained steady at $114.35 per SF. Rents in the city are likely to slip further with rising availability over the next year. City prime rents have fallen slightly to $88.43 per SF, as have prime rents in Midtown-a submarket that primarily comprises the Holborn district-to $73.18 per SF.

Frankfurt and Berlin activity, according to midyear 2002 "i on the Market" report:

Demand for office space in Frankfurt continues to wane. Leasing from January to June totaled 1.8 million SF, well below last year's 2.8 million SF leased through midyear. As a result, prime rents have fallen by 10% over the last year. Frankfurt's strong performance in recent years prompted declining availability, from a high of 9.2% in 1995 to a low of 1.8% in June 2001. Weak demand in recent months has since increased availability to 3.5%. Further increases are likely, with approximately 6 million SF of new construction due to come on line later this year. Prime office rents in Frankfurt's CBD closed midyear at $51.10 per SF.

There has also been a drop in demand for office space in Germany's capital city, Berlin. Activity in the first six months of 2002 totaled slightly more than 2 million SF, a decline of almost 25% from leasing. in the second half of 2001. Availability increased for the first time since 1996 to almost 14 million SF, or 7.4% of total inventory. The midyear rent level of $30.77 per SF already represents a slight decline over the past six months.

Brussels activity, according to midyear 2002 "i on the Market" report:

The first half of 2002 has seen a quicker-than-expected recovery in the Brussels office market, following a strong decline in demand last year. Leasing activity in 2001 fell significantly on 2000's level, totaling only 5.7 million SF. This year, however, 3.1 million SF has already been leased, signaling a more active market and surge in confidence for many tenants. Traditionally one of the more stable rents in Europe, Brussels prime office rents dipped by 10% at the end of 2001 before recovering to $20.42 per SF by mid-2002.

Dublin activity, according to midyear 2002 "i on the Market" report:

Increasing speculative development in Dublin in 2001, coupled with a decline in demand, caused availability to rise sharply from 2% to 8% by year end. This situation was further compounded in the first half of 2002, pushing availability to 15.0% at midyear. Nevertheless, prime office rents have remained steady at $47.53 per SF and are not expected to fall. Demand has shown signs of recovery in 2002. Activity through midyear reached 900,000 SF, up slightly from 2001 's first-half total of 855,000 SF.

Amsterdam activity, according to midyear 2002 "i on the Market" report:

Availability in Amsterdam has soared to 9%, from 1% in 2000 and 4% in June 2001. Activity in the first six months of 2002 totaled just 1.46 million SF, a mere 38% of the total leasing during the first half of 2001.

Continued weak demand in 2002 will cause availability to rise further in the short term. Somewhat surprisingly, prime office rents have not been affected by the imbalance between supply and demand. Rents for all but newly constructed space are expected to fall, due to the large amount of modem office space coming to market. Some rental decline in non-central locations, however, is expected over the remainder of 2002.

Madrid and Barcelona activity, according to midyear 2002 "i on the Market" report:

Leasing in the Madrid office market fell by 42% in 2001 as the economy slowed significantly. Increased new construction coming on line caused a rapid rise in availability, particularly in the periphery. Demand has remained weak in 2002. Additionally, prime office rents have fallen by 14% over the last six months.

Strong demand from other industries insulated Barcelona's office market from the sharp decline in the telecom sector that has occurred in the last couple years. Constrained supply in the city center will help prevent an excessive increase in availability, which totals 1.3 million SF, or 3%.