Due to the construction of nearly 4 million square feet of mostly vacant space, Sao Paulo dropped from one of the healthiest markets in 2002 at 7 percent vacant to the softest in South America with a vacancy over 30 percent. A gradual recovery will begin in 2004, slowly absorbing the oversupply of space, but rents are likely to erode further. Bogota, Rio de Janeiro and Santiago may represent the best options for investors due to their relatively stable fundamentals.
Office take-up throughout Europe is not expected to improve dramatically during 2004. The public sector has been a major demand driver in a number of locations and a large proportion of take-up in Europe is attributed to companies moving to modern, better quality buildings or relocating to areas where lower rental levels are achieved. Sublettings, however, have proved particularly attractive especially to those firms in the financial services sector who need to sub-let space due to testing market conditions.
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Looking forward, a recovery in office demand is expected in the next 12 to 18 months led by strengthening European economic indicators. Rental levels in most European markets have fallen and landlords have generally become increasingly flexible in terms of offering incentives in order to attract and secure tenants. Rents are generally expected to continue to decrease over the next year, although at a slower rate than experienced in 2003. In some markets rents are expected to stabilise. Although rental recovery is dependent on economic growth and an improvement in business confidence, 2004 is now widely perceived as a recovery period.
Rents have stabilised or declined only modestly in certain markets where new supply is limited such as Milan, Paris and Brussels. well reward employees and have a depth of management talent to drive the business forward. Technology firms have also proved resilient.