Office Rents Down As Vacancy Rates Climb Slightly

New York, NY, July 7--Office rents declined nationwide as the economy continued to shed jobs in the second quarter, according to a new survey. National office vacancy rates edged up in the quarter to 16.5%, from 16.3%, while rents continued their slide, falling 2% to a national average of $21.04 per square foot per year. But while a gloomy jobs picture continues to plague the industry, some landlords see reasons for optimism, following a near doubling of the vacancy rate in a little more than two years. One of the main bright spots: a decline in "negative absorption"--when tenants put more space back on the market for sublease than they rent. The amount of negative absorption was 2.8 million square feet in the second quarter, much less than the 4.2 million in the first quarter, according to the survey of the top 50 U.S. markets by Reis Inc., a New York real-estate research firm. Furthermore, the approximately seven million square feet of negative absorption in the first half of this year was markedly less than the 29.6 million square feet recorded in the first half of 2002 and the 30.8 million square feet in the first half of 2001. "There's a general increase in leasing activity year over year," said Bruce Mosler, president of U.S. operations for Cushman & Wakefield, a New York real-estate services firm. In Manhattan, he said, 12 leases of more than 100,000 square feet were signed through midyear, twice as many as during the first half of 2002. Signs of life--in the form of decreased vacancy rates this year--are emerging in certain markets, including the District of Columbia, San Diego, and Miami/Fort Lauderdale, said Lloyd Lynford, chief executive of Reis. Another positive for the market is the slowdown in new construction: Completions of new buildings dropped to 6.8 million square feet in the second quarter--way below the annual pace for 2001, when 113 million square feet flooded the market. "There's some more discipline going on," Lynford said. Still, brokers say, a solid turnaround isn't going to happen until the employment picture improves. "People are beginning to buy into the idea that the economy is recovering, but we haven't seen real employment growth," said Mosler. He added that before rents can reach bottom, the huge amount of sublease space in the market must be filled. The unemployment rate jumped 0.3 point to 6.4% in June, the highest rate in nine years, according to Department of Labor statistics released Thursday. Among the cities continuing to be hit the hardest by the downturn, according to the Reis survey, were San Francisco, San Jose, Boston and Austin, Texas. In San Francisco, the vacancy rate rose to 21.2% in the second quarter from 21% in the first quarter, while rents fell 3.5% to $25.01 a square foot. "San Francisco has been punished for ten quarters," Lynford said. He said San Francisco's average rents jumped 55% from the end of 1999 to their peak at $58.42 a square foot five quarters later in 2001. The average rent in San Francisco is down about 57% from the high. Mosler expects the economy to slowly improve, and the office market to show positive absorption between now and the end of the year, with rents rising slightly. But, he said, another potential spoiler is "shadow space," offices that are empty but not on the market. If the economy improves and rents begin to increase, that space could begin to come on to the market.