PORTLAND-While “uncertainty” was the watchword for 2002 following the terrorist attacks, there is no uncertainty about 2003; it’s going to sting…and could leave a welt or two. That’s the word from Peter Korpecz, Director and Head of the Strategic Real Estate Group at Pricewaterhouse Coopers, which produces the annual national forecast publication known as “Emerging Trends In Real Estate,” which is based on interviews with investment advisors around the country.

Korpecz, in town to present the report’s findings to the local chapter of the National Association of Industrial and Office Properties, says that 2002 brought us more security, less immigration and a general distrust of corporate America, which has tempered expectations. In 2003, those lowered expectations will come in handy, as the downside risk has increased and upside potential is almost non-existent.

Following an elongated peak that now seems a distant memory, Korpecz says we’re in for an “elongated trough.” If the amount of sublease space on the market drops off, it’s only because those leases are expiring and turning into direct vacancies. As a result, “income security” is falling, and as leases continue to expire through 2003, it will only get worse.

Moreover, when the economy recovers, Korpecz says corporations will start by filling up their “phantom space”– the existing leased space they have been underutilizing, such as extra offices being used as storage. “Until that gets eaten up, there’ll be no need for these firms to lease or buy new space,” says Korpecz. “It’s going to take time.”

All that means rental rates will continue to fall through 2003. The good news — or the best of the bad news, anyway — is that rents probably won’t be dropping as rapidly. That, says Korpecz, could be seen as a harbinger for an eventual halt in the decline, which would be followed by a flat period (think late 2003-2004) and, eventually, another rising trend. As stated by one local broker on a recent NAIOP bus tour of the flex-heavy and heavily vacant Sunset Corridor, the new motto in Portland and probably elsewhere around the nation is “Stay alive until 2005.”

As part of the turnaround, Korpecz says it’s time for corporations to start sharing the load with the now debt-ridden consumer by picking up their spending in preparation for the rebound — and by doing so, possibly hasten its arrival. The problem with the scenario, says Korpecz, is “that new, new thing” that will generate the necessary demand has not shown up yet.

Meanwhile, Korpecz says the two crutches holding up the real estate market — low interest rates and a flow of capital from the stock market — are tenuous at best. First, the latest lowering of interest rates means the economy was worse than previously thought. Two, the longer the economy struggles, the less attractive real estate is going to look, which will shrink that flow of capital. Finally, it will shrink again when things start to rebound, as money flows back into the stock market.

Having said that, investment in real estate will still be higher than it’s even been, says Korpecz, and as there are exceptions to all these problematic situations, investors still see opportunity in certain real estate sectors and, as always, in buildings well-occupied by credit tenants locked into long-term leases.

The Emerging Trends report’s best investment bets for 2003 include: warehouses in major transportation hubs, as “values there hold better than for any other property type”; urban office buildings, ones in 24-hour markets without near-term leasing exposure; regional shopping centers, which can only be invested in through REITs these days, as they’ve bought them all up for their economies of scale; flex space in previously hot tech markets, but only at distressed prices.

As well, the report advises investors to: hold onto apartments, as more money can be had selling once occupancies and rental rates are on the rise again; borrow money, to leverage up returns on stabilized assets or to prudently enhance properties; prune some grocery-anchored retail–not all of them, just the ones where Wal-Mart is likely a future competitor; and, sell quality assets, because “it’s an absolute sellers market,” as there’s tons of capital for any and all stabilized investments.

As far as the best markets for 2003, the top 10 stayed largely the same, though they’ve swapped ranking in some cases and generally are scarred by less return and more risk. Those markets include, in 2003 order, Washington D.C., New York, Los Angeles, San Diego, Chicago, Boston, Miami, San Francisco, Seattle and Philadelphia. The only top 10 city to drop out of the top 10 from 2002 to 2003 is Denver, which fell from 10th to 19th. Portland is listed as 11th for both 2002 and 2003.

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