(BUSINESS WIRE) Conditions in the U.S. office markets remain as dire today as they were during the real estate market collapse in the early '90s, but after peaking this year at about 17.5 percent, vacancy rates should decline gradually over the next three years as the balance between supply and demand for office space returns, Prudential Real Estate Investors (PREI) said in a recent research report. PREI is the real estate investment advisory business of Prudential Financial, Inc. (NYSE:PRU).

In the report, "The Office Market Recovery Ahead," PREI said that some markets will experience a more rapid turnaround than others, and as vacancy rates peak and rents begin to stabilize, investors may be able to find opportunities to earn excess returns. The full report is available at PREI's website: www.prudential.com/prei.

"Supply growth should remain subdued, and tenant demand should rise as employment growth resumes," said Youguo Liang, managing director, PREI Research. "Office vacancy rates should fall, allowing property owners to raise rents as the supply-and-demand balance returns. For investors seeking value-added returns, the office market recovery will provide opportunities to buy assets with leasing risk in high-growth markets."

New office supply has also fallen dramatically since 2001 and should remain constrained for several years before the supply pipeline begins picking up, the report said. That constrained supply is essential to allow property owners to increase rents, which have fallen by about 20 percent since peaking in 2000. The decline leaves ample room for growth over the medium to long -term, even though rents will likely fall further as demand accelerates and landlords compete for tenants, according to PREI.

When office rent growth will resume and how quickly rents will rise depend heavily on the strength of the ongoing corporate recovery and on employment growth. Office rent growth should resume by 2005 if office vacancies peak this year and the rent cycle mimics the recovery of the 1990s.

"For investors, the office market recovery will create attractive opportunities, but those opportunities will be distributed unevenly across markets," Liang noted. "Investors will likely be able to exploit the rebound in 'commodity' markets that will see the biggest bounce in occupancy and rents over the next two to three years."

Those "commodity" markets include cities like Atlanta, Austin, Charlotte, Dallas, Denver, Orlando, Phoenix and Raleigh, with readily available land and few barriers to development. "The recovery play in those markets is to use a short-term strategy to buy below replacement cost and sell high," Liang said. For a longer-term strategy, cities with significant inventories of office space, like New York, Washington, D.C., and Los Angeles, will create opportunities to increase core exposure.

PREI, comprised of fund management centers in Parsippany, N.J.; Atlanta, Ga.; Boston, Mass.; Munich; London and Singapore, is supported by a network of local offices throughout the world. Its specialized operating units offer a broad range of investment opportunities and investment management services in the United States, Europe, Asia and Latin America. PREI managed $21.7 billion for more than 400 clients as of September 30, 2003; net assets under management (i.e. after deduction of associated debt and liabilities) were $15 billion.

Prudential Financial companies, with approximately $421 billion in total assets under management as of September 30, 2003, serve individual and institutional customers worldwide and include The Prudential Insurance Company of America, one of the largest life insurance companies in the U.S. These companies offer a variety of products and services, including life insurance, property and casualty insurance, mutual funds, annuities, pension and retirement related services and administration, asset management, securities brokerage, banking and trust services, real estate brokerage franchises and relocation services. For more information, visit www.prudential.com.