David AuBuchon, senior research analyst for the Milwaukee-basedcompany, tells GlobeSt.com that "I doubt any market in the US willshow material rent growth this year." Logically, some will be hitharder than others by the financial markets turmoil that began withthe subprime housing loans and has spread throughout theeconomy.

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AuBuchon cites government employment data and other economicreports to show that "we are in the midst of a weakening officeenvironment." He estimates that the downturn, which began in latesummer 2007, could last another six to 12 months, a period that hedescribes as shorter than typical for such a slump.

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AuBuchon's report warns of potential problem markets New YorkCity, Chicago, suburban New Jersey and Connecticut. It also pointsout some markets are showing strength because they aresignificantly less dependent on finance-related tenants. Amongthose are San Diego, Seattle, Tampa Bay, Houston and Atlanta.

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The impact of the job losses on office market rent growth andvacancy will likely be milder in this downturn than the previouscycle, when the technology crash of 1999-2000 severely walloped anumber of US markets. Among the factors AuBuchon cites for themilder impact this time around is "the general lack of excesssupply in most markets."

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AuBuchon cites statistics showing that office payrolls continuedto deteriorate, posting the third consecutive negative month andseven declines in eight months. Also, payrolls in the businessservices sector "have begun to weaken materially revealing a thirdconsecutive down month, the first such sequential decline sinceFebruary '01," he concludes in the report. Overall, office payrollshave lost 91,000 jobs in 12 months and 232,000 jobs since July2007.

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Although the report focuses on office payrolls, it points outthat the payrolls "are not an exact predictor of the office market"because existing vacancies, anticipated supply growth and projectedrent growth all play a role in shaping the office market. Anotherfactor is sublease space. The US office market is "already seeinganecdotal evidence that sublease space is resurfacing," AuBuchontells GlobeSt.com. The sublease space, if it continues to grow,will suppress rent growth as it competes with direct space andoffers lower rates.

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AuBuchon, however, also points to uncertainty regarding thedepth and duration of the economic slump, the payroll cuts andtheir impact on the office market. "The financial roots of theglobal economic slowdown have created an environment with masslayoffs and cost-cutting measures that could hurt those markets andREITs," he says. "Recent wild variations in the financial payrolldata are evidence of the uncertainty."

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Until those wild swings dissipate, AuBuchon believe markets andbuilding owners that depend significantly on finance-relatedtenants "have incremental risk in the near term." His reportexamines the Top 25 office markets, based on total square footage,in analyzing the impact of job losses on those office markets. Justas job losses foretell a slumping office market, he says the firstsign that the downturn is reversing will be a quarterly increase inoffice payrolls.

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