The uptick in leasing activity, which comes from a recently-completed 400,000-sf building in the Chicago market as well as office properties in Minneapolis, also can't negate a fourth quarter that saw funds from operations rise just 3.2%, ending a year that saw a 6.5% increase in FFO.

"Needless to say, this past quarter was extraordinarily tough, and frankly, our performance wasn't as good as it should've been," Hefner says. "There's no question the recession and excess liquidity we've discussed before affected our performance."

Occupancy also dipped to 86.6% across the company's 107-million-sf portfolio.

"Part of the deterioration was due to the economy, but a significant part of it was self-inflicted," Hefner says. He explains Duke sold 7.3 million sf of property in the fourth quarter that was 94% leased, while putting into service 8.9 million sf from its development pipeline that came on the market 51% leased.

One example of Duke Realty's dilemma can be found in suburban Chicago's East-West Corridor, which has re-emerged as a strong submarket with positive absorption of 829,060 sf, according to U.S. Equities Realty. However, Duke Realty will add 167,575 sf in the middle of the year with an office building at 4101 Winfield Rd. in Warrenville.

"Our development pipeline is leasing slower than we anticipated," Hefner says. While occupancy is the lowest it has been in eight years, so is the REIT's bad debt levels, though not enough to cause serious concern, he adds.

"We sense our business has bottomed and we'll begin to see a pick-up in activity," Hefner says. "Frankly, though, our goal is for the first half of 2002 to be continued flat performance…We can quickly get back to industry-leading returns when the economy turns."

At the onset of the downturn, Duke Realty embarked on an aggressive cost-cutting program that slashed general and administrative costs by 25%, Hefner says. "We sincerely believe we've cut all the fat out of our business," he adds.