January 2008 VOL. 2

Q&A with Raymond Torto of CBRE Torto Wheaton Research

The Global Real Estate Monitor sat down with Raymond Torto, Ph.D., principal & chief strategist at global research and consulting firm CBRE Torto Wheaton Research, to review the hottest commercial property sectors in 2007 and to give us an idea of what to expect this year

GREM: Which property sectors were the best performers in 2007, and which ones will standout in 2008?

TORTO: The best performing sector in 2007 was office, with rents rising on average over eight percent nationally and rents in San Francisco, San Jose and New York topping the list with low teen increases.

The hotel sector followed with average daily rates rising about seven percent, while the industrial markets felt the effects of a decline in imports and averaged four percent increases in rents in 2007. Formerly hot industrial markets on the West Coast saw an unexpected slowdown in cargo containers shipments, which affected absorption and rental increments for those markets.

For 2008, we like the prospects for industrial property. A combination of strong exports and continuing importation from the factory of the world --China--will keep this sector moving forward, albeit not at the pace of 2007.

GREM: How has the housing market impacted the retail real estate sector from a leasing and development standpoint?

TORTO: Single family housing is severely over supplied - prices are dropping and the homebuilding industry is in recession - yet, retail is seeing some growth in rents and continued positive absorption. # However, big box retail that has catered to the home modeling and furnishing business is feeling the effects of this housing downturn, and in some localities, absorption and new development is down directly due to housing.

In general, across the whole economy, retail sales are down due to the current economic slowdown. Interestingly, off shore buyers with strong currencies are flocking to the States to buy at the retail level.

GREM: The condo market has dried up significantly during 2007. Which cities are suffering the most?

TORTO: The usual suspects are Florida, Nevada and Southern California - markets that saw a lot of condo conversions and ground-up new construction (which is still taking place). Local realty associations are reporting that year-to-date condo sales are down over 40 percent from the same period last year in Miami and Las Vegas and over 55 percent in Orlando.

Interestingly, median condo prices in these areas are down only slightly or flat. Some are even up slightly year-over-year despite the big drops in sales. We anticipate this price data is reflective of seller resistance, not a market "clearing" price in this environment.

GREM: What kind of commercial property development did the market see in 2007 and what do you expect in 2008?

TORTO: While there are some areas with over supply concerns, especially in office and retail properties, development across the country is fairly well under control. Across the various property types, new supply is growing about two percent a year, which will not lead to a general overbuilding situation in any property type.

The lower supply levels during this decade are due to greater transparency in the market, higher construction costs over the last few years, and larger national developers focusing more on international opportunities. By contrast, back in the 1980s when commercial real estate severely overbuilt, the growth rates for new supply were at least four percent for most types and eight percent for office properties.

GREM: What were your biggest concerns about the office market coming into 2007, and what are your concerns as we enter 2008?

TORTO: We were optimistic for office market rent momentum as we entered 2007, but we anticipated a slowing economy due to the housing, auto and import slowdowns as 2007 went on, and we forecasted a slight tick up in vacancy rates for the office sector by year end.

Generally speaking, the markets in the Northwest and the major technology markets did well in 2007, but the office markets in the overbuilt housing markets such as Florida saw serious slowdowns in absorption in the office sector.

For 2008, we expect this bifurcation of who is doing well and who is doing poorly to continue. We are also watching sublease space coming on the market in certain locations. The second quarter was the first time in five years that we saw an increase in sublease space in the market and third quarter numbers rose again, by five fold. Although the sublease numbers are still small in terms of square footage, sublease space bears watching.