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Fitch: Office, Apartment Markets Likely to Remain Soft This Year

Fitch Ratings expects to see continued weakness in the office and apartment sectors for the next year.

Based on a study of the interaction, over a 10-year period, between property types and markets, the rating agency has assigned scores to different markets.

Fitch has made volatility-based rankings ranging from one to five to different property markets, with one representing the least volatility.

Fitch's latest study found that 145 secondary markets improved their volatility scores.

Of these, 47% were in the retail sector and 28% in the hotel sector.

Mary O'Rourke, senior director, Fitch Ratings, said, "Fitch expects to see a continued softening in the office and apartment sectors for at least the next 12 months and anticipates a decline within the retail sector starting in the second quarter of 2003."

And while the hotel sector's overall volatility score showed a "small improvement," the sector still has the worst volatility group performance, with an overall score of 4.29.

Forty secondary markets declined by one volatility group, Fitch reports.

Of these, 58% were in the apartment sector, 25% in the retail sector and 10% in the office sector.

Ms. O'Rourke said, "Regarding the office sector, most markets are already experiencing the impact of the decline in office users and the demise of both small and large companies.

"What is coming, however, is a continuation of downsizing within the FIRE sector, and continued restrained capital investment by business in general. Both conditions do not bode well for office buildings over the next 18 months as leases come up for renewal, particularly in suburban or secondary markets."

Property market scores for secondary markets are typically over 100 basis points higher than the scores for primary markets, the rating agency said.

Fitch has not discerned any geographic pattern in either the improved or worsened scores, but believes that there is a performance difference "between and among markets in those states with high CMBS loan contributions."

For instance, in comparing primary markets in California, Florida, New Jersey and Texas, Fitch finds that Texas is "decidedly weaker," considering the retail sector, than the other states.

In this sector, the state's volatility score of four compares to two for New Jersey and California and 2.3 for Florida. Fitch also finds a similar pattern in comparing the primary and secondary office markets in the four states.

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