The Collapse of the U.S. Economy

Office Vacancy Rate Hits 16-year High

April 5, 2010

Reuters - The U.S. office vacancy rate in the first quarter reached its highest level in 16 years, but the decline in rents eased and crept closer to stabilization, according to a report by real estate research firm Reis Inc.

The U.S. office vacancy rate rose to 17.2 percent, a level unseen since 1994, as the market lost about 11.6 million net square feet of occupied space during the first quarter, according to the report released on Monday. The U.S. vacancy rate inched up 0.2 percentage points from a quarter earlier and was 2 percent higher than a year ago.

"As labor markets stabilize, we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given typical lags in commercial real estate," Reis director of research Victor Calanog said in a statement. "Even as occupancy continues to deteriorate, we're observing signs of renewed leasing activity across different metros."

The U.S. office vacancy rate hit a cyclical low of 12.5 percent in the third quarter 2007.

Rental rates fell an average of 0.8 percent in the first quarter, a less steep decline that seen last year. Asking rent fell 4.2 percent from a year earlier. Factoring months of free rent and landlord contributions to space improvements for each tenant, effective rent was down 7.4 percent from a year earlier.

Both asking and effective rent were off 0.8 percent from the fourth quarter 2009. The fact that effective rent is no longer falling at a greater rate than asking rent is an indication that landlords may have offered enough concessions to stimulate leasing activity.

"While we do not foresee positive rent growth resuming until next year at the earliest, office buildings at least do not seem to be experiencing as much distress relative to 12 months ago, when we were just heading into 2009 and most markets and economies around the world were still in deep turmoil," Calanog said.

"We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise," Calanog said. "This is bad news for loans supported by office properties that have to contend with at least six to eight more quarters of falling income."

Tight credit markets also have curbed office construction with only 3.6 million square feet of office space coming online, the lowest level of completions since Reis began publishing quarterly data in 1999.

The office vacancy rate increased in 57 of the 79 primary metropolitan areas that Reis tracks. Effective rents fell in 56 out of 79 markets, down from 70 in the fourth quarter 2009.

New York, the largest office market, saw its vacancy rate rise 0.1 percentage point to 11.7 percent from 11.6 percent. Effective rent slid 2.1 percent, less than half the 5.3 percent drop seen in the fourth quarter 2009.

Washington DC has overtaken New York as Reis's tightest market, with DC sporting the nation's lowest vacancy rate of 10.4 percent. Detroit, home of the U.S. auto industry, continued to suffer the most, with a 26.2 percent vacancy rate, the highest in the nation.