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CEO Daily Brief – Feb. 22, 2011

‘Modest’ Growth Predicted for U.S. Office Rents CEOs who are looking for office space rentals may want to find it …

‘Modest’ Growth Predicted for U.S. Office Rents

CEOs who are looking for office space rentals may want to find it now before prices start to inch up. U.S. office rents will see growth for the first time in three years during 2011, according to a new study. CB Richard Ellis Group predicts “modest” growth in office rentals which will be “limited to key markets.” A more complete recovery is expected to speed up during 2012, the study said.

CB Richard Ellis says that rents in San Francisco will lead in gains, with an average annual increase of at least 9 percent during the next two years, Bloomberg reports. New York is second with more than 7 percent. Phoenix and Orange County, Calif., will see rents at an annual rate averaging more than 4 percent.

CB Richard Ellis said U.S. commercial real estate values began increasing in 2010 in locations such as New York, Washington, D.C., and Boston. The Midwest and locations hurt by the drop in housing prices have struggled, the study adds.

The study further predicts that rents may actually return to their pre-recession levels during 2014.

“The pieces are in place” for office rents to increase, according to Art Jones, senior economist for CBRE Econometric Advisors, a unit of CB Richard Ellis. “Once hiring picks up, the market’s in a good position to capitalize and recover.”

Rents in 2010 decreased to $25.62 a square foot from $26.84 a square foot in 2009. CB Richard Ellis predicts office rents will increase to $26.08 a square foot during 2011.

Office rents are expected to reach $29 a square foot by the end of 2013. The study says rents could return to their 2008 peak of $30.57 cents by 2014. Vacancy rates could drop to 13.3 percent by 2014, which would be the lowest level since 2007, the study said.

For more on office rents, as reported by Bloomberg, please click here.


Wal-Mart's U.S. Sales Need To Be Turned Around

The nation’s largest retailer, Wal-Mart Stores, saw its seventh consecutive quarterly drop in sales at existing U.S. stores, Reuters reported. The company predicts it will take time to turn sales around.

Reuters said Wal-Mart struggled with pricing because it lost numerous customers to dollar stores.  It is also facing the results of a company decision to reduce the number of items it offers for sale. The chain since increased its retail stock, reversing its unwise earlier decision.

"Some of the pricing and merchandising issues in Wal-Mart ran deeper than we initially expected, and they require a response that will take time to see results," Wal-Mart CEO Mike Duke said in a statement quoted by Reuters.

Even though the United States represents most of the company’s retail sales, Wal-Mart has expanded into over a dozen foreign countries. It wants to see further international growth.

What happens to Wal-Mart is a major barometer for the retail sector as a whole, and can also give insight into trends in consumer product manufacturing. It is of note that Wal-Mart lost customers to dollar stores. Lower prices at Wal-Mart were the cause of many Main Street independently-owned stores going out of business. It shows how consumers will follow low prices. Retail CEOs need to take note.

For more about Wal-Mart, as reported by Reuters, please click here.


Egypt, Libya and BRICs

Parag Khanna, a research fellow at the New America Foundation notes that Egypt, Iran, Pakistan, and Nigeria have large populations, they have Moslem majorities, and are facing political unrest. They are also emerging economies that have been named as part of Goldman Sachs' "Next Eleven," which is an extension of the "BRICs" countries –Brazil, Russia, India, and China.

The use of the term “BRIC” has gotten a lot of attention. But when considering the nations one often loses an understanding of the specific challenges in each of the nations, or of emerging economies in general.

Khanna says using acronyms tends to have analysts miss more important factors. These include: levels of inequality and ethnic volatility, unemployment, corruption, military control of the economy, the presence of a succession plan for the next generation of leadership, sustainability of investments, economic diversification, and the response of the financial sector to crisis, Khanna said.

“They [the nations] are highly differentiated and need to be understood one at a time, with regional trends often more significant than global ones,” he said. “It is promising that Bank of America has just announced a partnership with leading political risk advisory firm Eurasia Group to provide geopolitical insights both for wealth management clients and to adjust portfolio allocations. This approach may not yield sexy categories like BRICs, but is far more likely to teach us that not all emerging markets actually emerge.”

CEOs need to pay attention to individual trends in these emerging economies. Many companies are looking at them as major profit centers. Yet, business leaders may be unfamiliar with the challenges present in these countries.

For more about emerging markets, as reported by The Harvard Business Review, please click here.

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