Vacancies Rise, Leasing Falls

The studies by C&W and Grubb & Ellis show the average vacancy rate for US office space rose during the quarter. C&W's report focused on CBDs while Grubb & Ellis addresses all categories. Both firms' forecasts suggest the office market is in for more slowing well into 2009 as a result of the overall slowing in the US and world economies.

The first looks at the Q3 results by the two firms indicate the office market remains relatively tame in comparison despite the turmoil and roller coaster-like leaps and plunges of the stock market. Robert Bach, senior vice president and chief economist for Santa Ana, CA-based Grubb & Ellis, says in his report: "With a full-blown panic gripping global debt and equity markets, one might expect a rapid deterioration in US office leasing market fundamentals. One would be wrong. Market conditions softened for a third consecutive quarter, but the pace of softening was moderate."

C&W reports an increase to 10.6% in the national CBD vacancy rate versus 10.2% in Q2 while Grubb & Ellis shows the CBD vacancy rate increasing by a tenth of a percentage point to end the third quarter at 11.3% and the suburban vacancy rate rising four-tenths of a percent to 5.8%. Grubb & Ellis pegs the overall vacancy rate for CBD and suburban markets combined at 14.3%, up three-tenths of a percentage point for the quarter.Since bottoming at 13% in fourth quarter 2007, overall vacancy in the US office market has increased 1.3%, Grubb & Ellis reports. By comparison, vacancy rose by 3% in the opening three quarters of the previous softening cycle in 2001 and 2002, Grubb & Ellis points out.

C&W tallies a 13.6% decline in office leasing activity, which totaled 53.4 million sf through the end of the third quarter in comparison to 61.8 million sf for the same time last year. "The slowdown in leasing activity year-over-year has largely been driven by uncertainty in the broader global economy," Maria Sicola, executive managing director and head of research the New York City-based C&W, says in a prepared statement. Sicola's report points out that "rising unemployment year to date, and the more recent impact of issues affecting the banking and financial services sector, have caused many occupiers to reevaluate their long-term space requirements prior to making commitments.

Although C&W lists Boston as the city with the lowest CBD vacancy rate at 7%, Grubb & Ellis tracks New York City as the lowest. "Despite the conflagration on Wall Street, New York retains the lowest vacancy rate among major US markets at 6.2%, up from a low of 4.5% in the fourth quarter of 2007," Grubb & Ellis reports. Vacancy is highest in Detroit at 23.0%, but Phoenix, with nearly four million sf in the construction pipeline and absorption in the red, "may soon overtake Detroit," Grubb & Ellis says.

The two reports both cite rising sublease space, with Grubb & Ellis pointing out that sublease availability increased for a fifth consecutive quarter to 91.5 million sf, the highest level since first quarter 2005. Not surprisingly, New York City led all markets with 8.9 million sf offered for sublease.

C&W shows average asking rents in the CBD rose to $40.95 per sf per year by the Q3 end compared to $40.19 at the end of June. Overall rates for class A and B space ended the third quarter at $36.30 and $26.96 per sf per year, respectively, according to Grubb & Ellis. Its team found asking rates dropped by 12 cents for class A space and 20 cents for class B space since the second quarter. But compared to one year ago, rates remained higher by 2.3% and 2.0% for class A and B space, respectively.

"We expect average asking rents to show statistical declines by the end of this year, and vacancies to continue to rise through at least the first three quarters of 2009," C&W's team forecasts.

Grubb & Ellis observes that "with the carnage in the global debt and equity markets for a backdrop, the performance of the office market in the third quarter was blessedly dull in comparison." It expects office market fundamentals to deteriorate through 2009 with a recovery likely to begin in 2010.