--The office market has settled into an aggressive softening cycle, the length of which will depend on when job losses dissipate.
-- The vacancy rate ended the second quarter at 16.6 percent, an increase of 100 basis points from the first quarter and 180 basis points since the start of the year. These movements are on par with the 2001-03 softening cycle during which vacancy rose by an average of 85 basis points per quarter.
--Manhattan, the New York Outer Boroughs and Long Island are holding onto their sub-10 percent vacancy rates, but spiking availability rates and sublease inventories suggest they will lose their grip within the next quarter or two.
Sixteen markets posted vacancy rates above 20 percent, double the number from the first quarter and quadruple the number from the year-ago quarter.
More than one-quarter of Phoenix’s office inventory is empty, followed closely by Detroit and California’s Inland Empire.
--Net absorption has recorded steep negatives this year at -19.3 million square feet in the second quarter and -18.2 million square feet in the first quarter. As with the vacancy rate, this performance is on par with the losses recorded in the thick of the softening cycle earlier this decade.
-- New York City (Wall Street, middle right photo) led all other markets on the downside by giving up 3.3 million square feet of occupied space in the second quarter, i.e. negative absorption.
Markets posting between negative 1 and 2 million square feet included Northern and Central New Jersey, Chicago and Los Angeles, a sign of how the recession has spread across all regions. A small handful of markets did manage to post positive absorption, led by Seattle (bottom left night skyline photo) with 561,000 square feet absorbed in the second quarter.
--The construction pipeline is emptying quickly; space under construction plummeted by more than 18 million square feet to end the quarter at 48 million square feet, its lowest level in four years.
-- A hopeful sign was that the inventory of available sublease space added a negligible 1.4 million square feet, by far the smallest quarterly gain since the market began to soften. In each of the prior two quarters, sublease space had increased by an average of 10.2 million square feet.
The sudden leveling off is one more indicator that the financial panic of last fall and spring has subsided. The sublease inventory totaled 113 million square feet at the end of the second quarter, its highest level since 2004-Q1 but well below the prior peak of 146 million square feet recorded in 2002-Q1.
--Asking rental rates, typically the last real estate indicator to register a change in the cycle, have turned lower. Year over year, the average rates across the U.S. are down by 3.2 percent for Class A space and 3.7 percent for Class B space.
The average effective rate, however, is down by 16 percent for all classes of space. In the early stages of a softening cycle, landlords and tenants typically negotiate over free rent, improvement allowances and other incentives that figure in the calculation of effective rates but do not impact asking rates. In the later stages of a softening cycle, asking rates finally begin to come down.
Forecast
As mentioned at the beginning of this note, the length of the office market softening cycle depends on when job losses finally abate. The following sequence of events seems plausible:
§ GDP turns positive: 2nd half of 2009
§ Labor market bottoms out: mid-2010 but growth is negligible until 2011
§ Vacancies peak and begin to turn down: 1st half of 2011
§ Rents bottom out and begin to turn up: 2nd half of 2011
§ The strength of the office market recovery in 2011and beyond will depend on the strength of the labor market recovery, which most economists expect will be weak.
A forecast based on the loss of office jobs (information, finance and professional and business services excluding temporary positions) through the middle of next year suggests that the vacancy rate could rise above 20 percent in the first half of 2011 from its mid-2009 reading of 16.6 percent.
Asking and effective rental rates may decline another 10 percent before they reach bottom sometime in 2011. The erosion in net operating incomes during this period will put additional pressure on owners who are struggling to refinance their loans in tight capital markets.
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ATLANTA, GA-- Cousins Properties Incorporated (NYSE: CUZ) announced today that its Board of Directors has declared a quarterly dividend of $0.15 per share, payable September 16, 2009, to common stockholders of record as of August 3, 2009.
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