CB Richard Ellis, which tracks a smaller amount of office spacein the market than Applied Analysis—approximately 36.1 millionsf—shows overall office vacancy at 15.9% as of the end of June.Within that total is 4.8 million sf of class A space that it foundto be 14.33% vacant.

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While new construction and business contractions related to theresidential market are overwhelming the pace of leasing, CharlesMoore, a local senior vice president with CBRE tells GlobeSt.comthat he expects to see a lot more investment activity in the thirdand fourth quarters because sellers are beginning to adjust theircap rate expectations, narrowing the bid-ask gap.

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One example is Centennial Corporate Center, an office-retaildevelopment adjacent to Painted Desert Golf Course that includes125,952 sf of class A office space, a three-story parking garageand 17,000 sf of service retail completed in 2006. It hit themarket several months ago at $54.6 million; today, it can be hadfor $45 million, not including the $2 million or so that will needto be spent on tenant improvements for the remaining vacantspace.

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When it came to market, it was expected that the 15% vacancywouldn't last. Instead it persisted, and the existingtenants—Centex Homes, Plise Development and title and mortgagecompanies—became less in favor as the residential market continuedto deteriorate. The new price, which represents a cap rate ofapproximately 7%, is an acknowledgement of the time it could taketo stabilize the asset, Moore tells GlobeSt.com.

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"Consistent with historical trends, the commercial real estatesector lags residential and is impacted by not only the localeconomic climate, but also regional and national economicconditions. Expansions in professional services have slowed, andcompanies considering relocation or expansion are being much morecautious and deliberative," says Applied Analysis' Gordon. "Asconfidence levels begin to report some improvement, the overallemployment market firms up and stability in the housing marketprevails, corrections within the office real estate market willfollow.

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"In the interim, property take-backs by lenders are expected tobecome more common, which will impact pricing, including landlordconcessions, going forward. Although ups and downs are notuncommon, the depth of this adjustment has us particularlyconcerned. We continue to believe in the ripple effect associatedwith multi-billion dollar investments in the resort and relatedindustries. Timing for many remains the x-factor."

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