The Merrill Lynch report labels nearly half of the 86 marketsthat it studied as distressed, including the Bay Area and SouthernCalifornia. It indicates that the national office vacancy rate rosefrom 15% at the end of 2001 to 17% at the middle of 2002. Inaddition, statistics show that there is little hope for a recoveryin the next 18 months. In fact, vacancy rates may hit 18% by theend of 2003, says Merrill Lynch.

Merrill Lynch reports that the lack of demand for space is themajor cause of the gloomy office market, with nationwide demandshrinking about 4.5% in the last 18 months. Landlords are competingfor tenants, which is leading to decreases in rental rates.

According to Grubb & Ellis' 3rd Quarter 2002 office marketreport, office demand in San Francisco actually turned positive forthe first time in two years, with vacancy rates dropping slightlyto 21.9%. However, lease rates also dropped. The average askingrate for San Francisco's finest office space is about $30 per sf,which is more than $30 less than it was two years ago.

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