Researchers: Office Market To Hold On

A summary of the outlook by Alexandria, VA-based Delta Associates says net absorption of office space is showing signs of deceleration although "office market conditions remain strong in many metro areas across the country, demand remains positive in major markets and vacancy rates are below equilibrium levels." The effect of changing market conditions suggests "asset re-pricing seems inevitable." Delta researchers also say "most of our clients report an expectation over the next year of a 10% price decline or a 50 basis-point increase in cap rates."

Reports from Grubb & Ellis Co., NAI Global and CB Richard Ellis all sound similar in their themes for the US office market in 2008. Robert Bach, senior vice president and chief economist at Grubb & Ellis, expects tenants will have more negotiating leverage with owners this year, pointing out about 55 million sf of new space is expected to be added to the US office market this year. He predicts it will end up "increasing the amount of sublease space and pushing office vacancy up a slim 20 basis points to 13.2% over the course of the year."

To put his forecast in perspective, Bach notes that vacancy increased at the rate of 100 basis points per quarter during the recession year of 2001 and again in 2002. "So a gain of 20 basis points in a year when the economy floats just above recession and the supply pipeline is poised to accelerate would qualify as a reasonably optimistic outlook," Bach says.

Bach's comment that the economy will "float just above recession" is comparable to observations by chief economists at CB Richard Ellis and NAI Global, who say the economy, although slowing, will not dip into a recession. Ray Torto, recently named as global chief economist for Los Angeles-based CBRE, has told GlobeSt.com several times recently that he doesn't believe the US economy is headed for a recession. CBRE has been telling its clients for more than a year that the markets would begin slowing. but that fundamentals remain sound. "While fundamentals are stalling, they're not getting worse," Torto says.

At Princeton, NJ-based NAI Global, both Jeffrey M. Finn and Peter Linneman cite strong fundamentals and a resilient US economy as reasons for optimism. Finn, who is NAI Global's president and CEO, says "fears of a slowing US economy and the credit crunch are clearly having an effect on investment real estate markets, even though commercial real estate fundamentals remain strong."

Linneman, who is NAI Global's chief economist and principal of Linneman Associates, comments that, "the US economy is too strong, and most companies and consumers are simply too well capitalized, for a recession to be triggered by the current capital markets disarray."

CBRE's yearend report for all US office markets showed that Charlotte, NC, Midtown Manhattan and Boston ended 2007 with the three lowest office vacancy rates in the country at 2.3%, 4.7% rate and 6%, respectively, all down slightly for the quarter. Among the suburban markets, Miami posted the lowest vacancy rate at 7.1%, with Honolulu next at 8.1% and Los Angeles third at 8.7%.

The Santa Ana, CA-based Grubb & Ellis' forecast calls for the class A asking for rents to increase 3% for CBD space and 2% for suburban space in 2008. "Effective rates will be under pressure as landlords begin to dangle more concessions to fill their buildings," researchers forewarn.

Grubb & Ellis says the there are markets likely to hold up well as the economy scrapes by in 2008 and despite likely layoffs in the financial services sector. The team foresees most resilient as Seattle, the Bay Area near San Francisco, Los Angeles County, the Mountain region, including Denver and Salt Lake City, Texas, the Carolinas, Washington, DC, Manhattan and Boston.