Experts: Office Market Belongs to Tenants

"I don't think this has bottomed out; we have at least another nine months to go," comments Kevin Lange, senior associate with Colliers International's Phoenix office. "It really depends on which submarket you're talking about."

Colliers Q1 report shows vacancies just a hair under 20%, with construction activity standing at 2.8 million square feet. The area inventory is 126 million square feet, with net absorption at close to negative 500,000 square feet.

CB Richard Ellis' numbers focus on a more narrow segment of office product, but vacancy rates aren't too far off from Colliers'. The CBRE figure show a 23% vacancy, with a 72.6 million-square-foot inventory and negative absorption of 589,492 square feet and 2.6 million square feet being built.

CBRE senior vice president David Carder says the square footage in the pipeline was launched during the start of the current recession. It was a gamble on the developers' parts, he notes. "But no one at the time could have foreseen the level to which things would slow down in the overall economy," he comments. On the positive front, he continues, there is no more speculative space in the pipeline after the current crop comes online.

But because of the economic drivers, tenants are able to make much more aggressive deals than they were a year ago. "We've recently seen tenants move toward finalizing leases or taking steps necessary to relocate, if that was necessary," he says.

To snag those tenants, Lange says, landlords need to do more than boost amenities. Fancy lobbies and flat-screened TVs by the elevators are all well and good, he says, but common areas aren't interesting tenants any more. Price is. As a result, subleases are extraordinarily popular among tenants. Furthermore, among the direct leases, "we're seeing a lot of short-term deals and leases," Lange comments.

Neither Lange nor Carder sees any change, either. Lange believes the next wave of problems will hit within the next year as student loans and other debt becomes due. The bottoming out, he continues, will likely be in late 2009 and into 2010.

Carder agrees, predicting that 2010 will also remain flat, though demand for space might pick up. "We may not see inventory go down that fast," he remarks. "But hopefully we'll be back to positive net absorption."