In a new report, Robert Bach, Chicago-based chief economist forSanta Ana-based Grubb & Ellis, says "there are key differencesbetween current conditions and those of the previous marketcontraction in 2001 and 2002." He points out that the US officemarket posted 24.5 million sf of positive absorption from thirdquarter 2007 until June 30, 2008, in comparison to 38.9 million sfof negative absorption in the contraction of 2001 and 2002. Overallclass A asking rents have also continued to increase, up 7%,compared to a decline of 6.3% during the previous cycle.

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Bach's report shows growing sublease space in the suburbanmarkets of South Florida, Atlanta, Austin, and Central and NorthernNew Jersey. Although Atlanta "has mirrored the national market withan increase in sublease supply of suburban class A properties,"Bach finds, adding rapid growth in medical and life sciencesindustries "has served to keep the market in positive absorptionterritory as of midyear."

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Chicago thus far has countered the national trend towardsuburban sublease space, with the majority of its increase insublease focused in the city's CBD. Despite the recent jump to 6.4million sf of available space, the market is far below the 12.6million sf available during the downturn of 2001-2002.

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One market suffering most from sublease space is Orange County,CA, where sublease inventory has soared by 52% during the pastyear, driven by consolidations and reductions in mortgage banking,software, training and legal industries. In nearby Los AngelesCounty, the residential real estate downturn is emptying officespace in the Tri-Cites submarket of Glendale, Burbank and Pasadenaas well as in the northern part of the county.

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The impact of sublease space in any given submarket "boils downto how competitive the space is compared to existing alternatives,"Bach states in his report. "Tenants looking to market subleasespace are in a more favorable pricing environment compared to theprevious cycle as overall asking market rental rates have yet todecrease."

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Bach expects additional sublease space will become available inthe coming quarters, predicting the majority will be suburban classA buildings. But, he adds "current conditions better positiontenants to mitigate their losses than in the previous softeningcycle." The report contrasts the broad market fundamentals in thisdownturn versus the previous cycle, pointing out that fundamentalsin general have remained positive during this contraction.

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During the downturn of 2001-2002, Bach says "developers reactedto dissolving demand by tabling new projects." In contrast,developers this time have continued to kick off new projects, withthe current construction pipeline passing the 100-million-sf markin the second quarter for the first time since 2001.

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