Southern California and New York City are ranked as the nation’s healthiest office markets, according to research conducted by Merrill Lynch. Office REITs that have a greater exposure to these healthy markets and other strong sub-markets are expected to outperform in 2005.

Top 5 Office Sub-Markets

Orange County

New York City-Uptown

New York City-Midtown South

Ft. Lauderdale

Belleview, Seattle

Worst 5 Office Sub-Markets

Dallas CBD

Cleveland CBD

San Jose suburbs

Atlanta CBD

Phoenix CBD

Source: Merrill Lynch

Among the office REITs that Merrill Lynch covers, Kilroy Realty Corporation (NYSE: KRC) had the highest exposure to these strong office markets (86 percent of its portfolio), due to concentrations in San Diego, Los Angeles and Orange County. Vornado Realty Trust (NYSE: VNO) came in second at 74 percent because of its strong presence in New York and Washington, D.C. Reckson Associates Realty Corp. (NYSE: RA) ranked third with 71 percent, also due to a strong presence in New York. In fourth place was Boston Properties, Inc. (NYSE: BXP) at 65 percent because of its exposure to New York, Boston and D.C.

Of the 71 sub-markets that Merrill Lynch tracked, Orange County ranked at the top of the list. The rankings were based on where current market vacancy rates are today and where they are projected to go over the next couple of years. Typically, markets with lower vacancy rates and the prospects for continued low vacancy rates into the future should provide landlords with more pricing power to raise net effective rents and therefore drive cash flow growth, according to Merrill Lynch.