A Grubb & Ellis report on the Inland Empire office market,for example, forecasts that building owners "will offer tenantconcessions and developers will reduce future project phases untilthe local economy remedies itself." The report bases its outlook onthe fact that the Inland Empire office sector "took its firstnegative absorption hit since the mid-90s" during the firstquarter. Along with a vacancy rate inching close to 15%, subleasespace rising and construction deliveries adding to the inventory,the report concludes that the trends add up to concessions fortenants.

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Rising concessions are already being reported for a number ofoffice deals throughout the country, including a recent series ofleases at 1500 Walnut in Philadelphia. The 325,000-sf, 22-storytwin tower office building landed 9,303 sf in new deals by usingfree rent and capital improvements to win over smallerbusinesses.

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One of the strongest office markets in the country before thesubprime meltdown was Orange County, where asking rents kept risingand concessions were unheard of for years. But now, according tothe latest reports, after the county's office market posted morethan 1.1 million sf of negative absorption in the first quarter,asking rates are leveling off and building owners are more willingto negotiate than they were a year or two ago. Forecasts saybuilding owners most likely will offer more concessions in the formof free rent, reduced parking fees, more generous tenantimprovement allowances and relocation fees as the year goes on.

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In Chicago, office space surveys by major brokerage firms showsuburban submarkets are shifting to a tenants' market. Marketexperts say building owners are poised to start offering moreconcessions. As is often the case when markets weaken, Chicagoowners are expected to boost concessions rather than reducingrental rates as a means of keeping rents at higher levels althoughthe effective rate works out to be lower for tenants.

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Even in Manhattan, one of the nation's strongest markets, marketobservers are conceding that free rent and some other concessionsare on the horizon because of the impact of the subprime meltdownon the city's many financial services companies. Marc Holliday, CEOof New York City-based SL Green, an office REIT, said in a recentearnings call that his team believes the leasing market in New YorkCity will soften as a result of the lack of financial servicesfirms' participation.

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Holliday estimated net effective rents could drop 10% to 15%from their peak levels. In addition, he said, "there could be somewidening of free rent to give some tenants relief from the stickershock that they might feel when they roll over from the old rentsto today's market rents."

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In general, market reports across the country say that theextent and types of concessions will vary from submarket tosubmarket within a region and even from building to building. Inother words, weaker buildings in weaker markets will have to resortto concessions more than their stronger counterparts in strongermarkets.

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