Office Sales Plunge, Weakening to Continue

Even more remarkable was how much of the plunge occurred in the fourth quarter, according to the Real Capital Analytics report. "No matter how you slice it, whether by global region, property type or deal type, year-over-year deceleration of activity in Q4'08 was remarkable for its velocity," the report states.

In the US, Palo Alto, CA-based Marcus & Millichap reported that office dollar volume was off by an estimated 80% as of third quarter of 2008, with the steepest drop in buildings in higher price ranges, due to the dearth of portfolio sales. Despite declining construction, it forecasts that office vacancy will rise to the 17% range in 2009 after climbing by nearly 2% to 14.4% in 2008. Its forecast adds, "On a positive note, the combination of reduced supply and the fact that most companies did not lease significant excess space during the most recent expansion should prevent a prolonged downturn, with the onset of a recovery likely in 2010." In New York City recently, an Urban Land Institute panel forecast a somewhat longer downturn, with economists warning of at least two more years of economic adjustments, challenges and hardship.

Regardless of when the recovery arrives, the forecasts agree that the US office market is in for some more hard times before the good times return. Marcus & Millichap points out that job losses--crucial to the office market--are forecast to continue at an accelerated pace in the near term. "The economic situation is likely to worsen before showing signs of stabilization in late 2009," its forecast says.

The office markets that have suffered the most over the past year were those most affected by the housing collapse, many of which also recorded significant overbuilding, such as Las Vegas, Orange County, Phoenix, the Inland Empire and South Florida, the Marcus & Millichap report notes. It cites only four markets that posted improvement or held steady over the past year: St. Louis, Portland, Chicago and New York, but the report adds that the Chicago and New York markets softened near the end of the year because of office job losses in the financial industry.

One result of the continued weakening will be sales of office buildings by owners who face maturing debt or other challenges. "There is a growing amount of distress in the marketplace, and those who need to sell due to maturing debt or operational challenges will find it necessary to discount prices to clear the market," Marcus & Millichap forecasts. Until recently, many owners were planning to ride out the tough times, but the deepening of the recession and credit crisis "may force many to rethink investment strategies and adjust price expectations accordingly," the company's forecast concludes.