Forecasts Looking for Bottom in Office Market

The three markets with sub-10% vacancy rates at the end of the fourth quarter were Manhattan, Long Island and the adjacent outer boroughs, according to Bob Bach, senior vice president and chief economist at Grubb & Ellis Co. Bach, who delivered one of the earliest 2010 real estate forecasts in New York City last year, said in his latest report that the overall US office vacancy rate increased again in the fourth quarter but at a more gradual pace than in recent quarters, but the increase of 30 basis points in the fourthquarter ranked significantly below the increases of 100 and 50 basis points in the second and third quarters.

CBRE Econometric Advisors sees the specific figures a bit differently but generally reaches the same conclusions in its latest assessment of the office market. "Across property types the consistent story is that while vacancy rates are not in decline, they performed better than expected in the fourth quarter," said Jon Southard, director of Forecasting for CBRE Econometric Advisors. CBRE-EA calculates that the office vacancy rate increased by 20 basis points to 16.3% at the end of the fourth quarter, and says that although vacancy increases remain broad-based, CBRE-EA believes some markets have approached their cyclical peaks; in the fourth quarter, vacancies rose in 37 of 57 markets.

However, Southard notes improvement during the fourth quarter in "a largely mixed bag of tech-centered markets such as San Jose and Denver with a few 'sunshine' markets like San Diego, Riverside and Jacksonville where the correction started earlier than in other areas." Additional standouts were Pittsburgh and Indianapolis, according to its figures. "With tame supply pipelines, both Pittsburgh and Indianapolis were well-positioned as the downturn began and they have performed well in spite of the recession," Southard says.

Jones Lang LaSalle CEO Colin Dyer sounded a similar theme regarding office vacancies recently at a JLL forecast in Los Angeles, where he also pointed out that rental rates are not dropping as fast as they once were. "The rate of decline in rental rates is slowing quarter-to-quarter as confidence recovers and companies begin to make decisions on space and expend capital, even if it is just to consolidate and restructure for the future," Dyer said. Office vacancy is not expected to peak in the United States until late-2010, while stabilization in leasing activity will not occur until 2011, as corporations begin to show confidence in acquisition activity and invest in growth again, according to JLL's forecast.

According to the Grubb & Ellis report, the biggest surprise of the fourth quarter was a decline in the inventory of available sublease space to just under 120 million square feet compared with nearly 124 million square feet in the third quarter. Some of this space reverted back to landlords as the underlying leases expired, but most of the reduction was due to sublease deals transacted at market-clearing rates combined with the addition of less new sublease space in the fourth quarter.

The Grubb & Ellis forecast accompanying its report says that althoughDecember's employment report showed a disappointing loss of 85,000payroll jobs, the fourth quarter loss of 208,000 was less than anyquarter in the past two years. "If employers begin adding jobs in thefirst half of this year, the office market could bottom out as early as mid-year and embark on a gradual, multi-year recovery in the second half of 2010," the forecast says. However, "If there is little job growth until the second half of this year, then the office market recovery could be pushed back to the first half of 2011," it says. The market will require about three years of steady economic growth to return to equilibrium, according to the forecast.