National Office Vacancy at 15.6% After Soft First Quarter

Manhattan, Long Island and New York Outer Boroughs Only 3 Major U.S. Markets to Post Under 10% Vacancy Rates

SANTA ANA, CA-Bob Bach, (top right photo) senior vice president and chief economist, Grubb & Ellis Co., reports on the first-quarter 2009 office market:

· Commercial real estate, viewed as a lagging indicator, is catching up with the rest of the economy, unfortunately, as office market fundamentals deteriorated sharply in the first quarter.

· The vacancy rate ended the quarter at 15.6 percent, an increase of 80 basis points since last year’s fourth quarter and 260 bps since vacancy bottomed at 13.0 percent in the fourth quarter of 2007. It was the largest quarterly increase of this cycle, meaning that the pace of softening accelerated in the first quarter.

(Manhattan financial districtd map, middle left)

· Manhattan, Long Island and the New York Outer Boroughs remain the only three major U.S. markets to post sub-10 percent vacancy rates, although Manhattan’s vacancy rate, like the U.S. average, has risen for five consecutive quarters.

Eight markets posted vacancy rates above 20 percent led by Phoenix, where vacancy is approaching 25 percent.

· Over the past four quarters, vacancy increased by 400 bps (one percentage point per quarter) or more in seven markets led by California’s Inland Empire, which recorded a four-quarter gain of 840 bps. Four markets saw vacancy rates decline year-over-year: Long Island, Columbia, S.C., Columbus, Ohio, and Wichita, Kan.

(Long Island, NY skyline, middle right photo)

· Net absorption, which registered only modest negatives in 2008, plunged to recessionary levels in the first quarter, mirroring the big slump in the labor market that occurred in last year’s fourth quarter.

First quarter absorption of negative 18.4 million square feet is comparable to the quarterly losses in occupancy that occurred after the dot-com bust, 9/11 and recession early this decade.

· Restructuring on Wall Street shrank occupied space in Manhattan by 2.8 million square feet in the first quarter. Several markets that were supposed to hold up well did not, registering large negative absorption totals.

These included Los Angeles (-2.5 million), Houston (-929,000), Seattle (-740,000) and Washington, D.C. (-723,000). The recession has left few markets untouched, though a handful of markets, led by Dallas-Fort Worth, did eke out positive absorption.

· Space under construction at the end of the quarter retracted to 66 million square feet, its lowest level in 2 ½ years.

Washington, D.C., with 9.8 million square feet still in the pipeline, may be facing some difficult quarters given that absorption has turned negative in all three of the region’s major submarkets.

· Available sublease space ended the quarter at 111 million square feet, its highest level in 4 ½ years. New York City, with 14.6 million square feet, nearly doubled the sublease inventory of second place Washington, D.C.

Three of the four major markets surrounding Manhattan posted the highest sublease vacancy rates in the country: Northern and Central New Jersey, Westchester County, N.Y., and Fairfield County, Conn.

(Downtown Columbus, OH, middle right photo)

· Rental rates are behaving erratically. The average asking rate of $27.67 per square foot per year, full service, for space available on the market at the end of the first quarter actually rose by 0.3 percent since year-end 2008.

But the effective rate on deals signed in the first quarter, which includes concessions offered to tenants, fell 2.1 percent from the fourth quarter.

Though counterintuitive, asking rates sometimes increase in the early stages of a recession because the construction pipeline continues to deliver Class A space that was started before the recession began, and much of it is being delivered empty.

The asking rates for this top-of-the-line available space are driving up the average, but because landlords will do deals at lower rates (sometimes much lower), effective rates are falling. At some point landlords will begin to compete on asking rates in addition to concession packages.

Forecast

The timing of a recovery in the office market depends on two related events: how quickly the economy begins to grow again and how quickly the labor market begins to add jobs.

While some analysts expect GDP growth to turn positive in the fourth quarter of this year, most expect the unemployment rate to continue rising until mid-2010 or later.

This could turn out to be a “jobless recovery” of the kind that followed the last two recessions when the economy was growing but not fast enough to encourage employers to hire.

There may not be an office market recovery worthy of the name until 2011.