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Commercial Real Estate Outlook: Downturn for Net Export Countries to Follow U.S. and Europe

New York, NY (05/08/2008)

Commercial property fundamentals will decline across most countries in 2008 or 2009, with downturns among the net exporter and commodity producing countries likely to lag those of Europe and North America says global real estate advisor Newmark Knight Frank in a trend report issued this week. Sales price compression, which began in the second half of 2007 for some major markets, will extend into more regions and market as downward pressure continues into 2008.

While these trends will be affected by the U.S. economy, they will not be tied solely to the resolution of the subprime crisis. "The collapse of the U.S. subprime residential mortgage market was the wind that resulted in the current rough seas, but eventual losses in the U.S. subprime mortgage market are expected to total $200 billion. This is a very small portion of the equity and reserve base of the global financial system," says Newmark Knight Frank Executive Managing Director Peter Kozel.

Rather, says Newmark Knight Frank, the continuation of the credit crunch may be tied to a broader event, such as the re-pricing of risk. "The credit and capital markets are still sorting out the equilibrium risk adjusted yields. As a result, there has to be some legitimate ambivalence about both the operating performance and the market valuation of real estate assets during the next year," Kozel says.

The Newmark Knight Frank report provides detailed trend data on sales and leasing activity across the world’s office, retail and industrial sectors for the periods both preceding and following the onset of the global credit crisis.

Among the report’s findings: The U.K. markets were among the most greatly affected by weakening demand. London, which was the first major market to sustain a drop in commercial real estate prices, saw prime yields move out by 75 basis points to 100 basis points in the second half of the year.

In New York City, investment sales activity in the last quarter of ’07 was down nearly 90% from the year earlier period. Because the pace of investment activity in most other regional markets had been less aggressive, the reduction in sales as activity has been less dramatic, the report said.

Outlook by Region

Newmark Knight Frank’s regional outlooks find the following:

- North America: Conditions preceding the current decline could soften the blow to North America’s office, retail and industrial property sectors. "The current downturn follows three years of robust gains in operating performance and market valuations. Further, the pace of new construction was not excessive in most property sectors.

These conditions should help to cushion the impact of declining demand," says Kozel. Longer term, fundamentals remain good, he says. Beyond 2008, Newmark Knight Frank is expecting solid performance from the property markets.

- Europe: Most occupier markets continue to exhibit positive dynamics despite the climate of uncertainty. Vacancy rates are still falling in many locations, including the key Benelux cities of Amsterdam and Brussels, while the limited availability of prime city center accommodation across Europe continues to push rents upwards, Newmark Knight Frank says.

"Overall, the levels of take-up recorded across Europe during 2007 were very strong, with cities such as Madrid, Munich and Dublin recording all-time high volumes of annual take-up. Reduced levels of take-up were discernable in the fourth quarter of the year in many markets, primarily in cities where demand is primarily driven by financial occupiers," says Joe Simpson, partner - International Research.

Nonetheless, projections are for economic growth to slow significantly in 2008, with Eurozone GDP growth slowing by a percentage point to around 1.6% this year. The downside risks will stem primarily from weakness in the U.S. economy, the continuing squeeze in the credit markets, rising food and oil prices, and the recent strength of the Euro which has affected the competitiveness of European exports.

- South America: Newmark Knight Frank’s outlook for South America is significantly stronger, as surging demand for industrial and agricultural commodities lifts the region’s economies. "The current rebound has touched virtually all of the countries in the region, most notably Brazil. Demand for space from domestic and foreign companies in São Paulo has escalated," says Kozel.

Argentina’s economy has also staged a strong recovery, and Mexico has benefited from foreign direct investment. "Construction activity is up dramatically during the last three years, but it is barely keeping up with demand," the report says.

- Asia-Pacific: Asia’s commercial real estate markets have weathered the global credit crunch relatively well with robust demand, tightening availability, and capital value growth in several markets, the report says. China is expected to continue its double digit growth, and India should record GDP growth of around 8% in 2008. Any further weakening of the U.S. dollar has the potential to curtail growth, however, as exports to United States will suffer. This may well be compounded by a weakening of consumer demand growth rates in the other major Western economies. The majority of countries in the region are, expected to grow at a slower rate over the medium-term.

- Australia: Yields for commercial/retail/industrial properties appear to be at a cyclical low, Newmark Knight Frank says. The convergence of yields between sectors and grades of assets has made many assets appear fully priced and, by extension, subject to greater price/value volatility should interest rate pressures and cost of debt issues continue.

"Given the financial market volatility, possible recession in the U.S., and falling property values in Western Europe and the U.S., the Australian market is no doubt exposed to greater risk and volatility in 2008," says Matt Whitby, research director, Australia.

- Africa: Africa is experiencing a period of sustained economic growth, with projected GDP growth for the continent of 7.0% in 2008. In South Africa, strong economic growth is fuelling continuing demand for space in causing vacancy rates to fall to low levels in major markets. With insufficient new developments in the pipeline and building costs escalating, there is strong upward pressure on rents, Newmark Knight Frank reports. There is also strong development activity in Nairobi and in Kampala, Uganda, and Gaborone, Botswana, developers are regaining confidence and beginning to build relatively small new developments, sometimes on a speculative basis, the report says.

Notably, though much of the continent’s retail activity remains focused around traditional street trading and markets, there are increasing numbers of modern shopping centers emerging across the continent. Newmark Knight Frank’s outlook for the continent is for continued growth in 2008.

For further information, or to access a copy of the full report, "Global Real Estate Markets Annual Review & Forecast 2008", please log on to Newmark Knight Frank’s website at www.newmarkkf.com.

Newmark Knight Frank is one of the largest independent real estate service firms in the world. Headquartered in New York, Newmark Knight Frank and London-based partner Knight Frank operate from over 165 offices in established and emerging property markets on six continents. Last year, transactions were valued at more than $47.6 billion with annual revenues of over $872 million. With a combined staff of more than 6,300, this major force in real estate is meeting the local and global needs of owners, tenants, investors and developers worldwide.