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DETROIT-A recent report by a Detroit real estate researcher jibes well with the findings in The Beige Book released by the Federal Reserve Board this week. Reports from most Federal Reserve Districts for June and July showcommercial real estate markets remained sluggish, a claim that’s verified ina recent report about the greater Detroit Metropolitan area by Joel Feldman,president of First Realty Co. of West Bloomfield.

Many districts reported increased office vacancies in metropolitan areas inthe second quarter, with signs of additional weakening in July, according tothe Fed study.

“The sluggishness that has affected the US economy for some time nowfinally is being felt in our speculative, multi-tenant office market,” Feldman says. “As a result, for the first time after some seven consecutive years of unprecedented prosperity, our local office market is experiencing a general slowdown accompanied by a sense of judicious caution, as both tenants and property owners await a clearer indication of where both the national and local economies are headed.”

Feldman adds there continues to be a slow and gradual decrease in occupancy, one that commenced in January 2000, when the local office market stood at an all time high of 94.3%. It slid to 92.3% in January of this year and then still further to 91.1%. He says this slide isattributable to company downsizing and slower commitments to the 2.6 million sf of new office space that came on line within the last year.

However, Feldman says the general Detroit market conditions are still solid,and occupancy rates are still higher than many other major metro areas.A number of the Fed districts noted that the swing in market conditions wasdue in part to an increase in sublease space. This has also happened inthe Detroit area, where absorption has slackened, and companies are rentingout space rather than using it, Feldman notes.

“There currently exists in excess of one million sf of sublease space in thearea, primarily in the suburbs, and more is on the way once companies inDowntown Detroit make expected moves. A record number of primary tenants are contracting via consolidation and subleasing, while trying to reduce their overhead. This fact is the best indication of the slowdown,” he says.

The potential for a significant amount of newly created non-income producing office spaces being placed on the market clearly exists, Feldman warns, which could decrease occupancy rates even further and increase the amount of negative absorption. This equation holds a major key to the near-term health and condition of what is now a solid but weakened local office market, he adds.

“Hopefully, by the time these leases expire, the economy will have improved, allowing this troublesome space to be leased at an acceptable level, so that it does not become a negative force in our marketplace,” he says.

While the economy is slowing, The Beige Book also says rental rates arestaying the same or rising during the crisis. The same is true for the Detroit market, Feldman says. Most communities except Detroit reported increases in rents, he adds.

“As long as the economy does not worsen further and provided a cautiousmindset prevails so that new construction is curtailed and an adequateamount of time is allocated for the filling-in of the more than 20 newdevelopments that have been completed over the last year, the worst of theslowdown may be well under way. The underpinnings of the Detroit marketshould be reinforced over the course of the next six to nine months,”Feldman says.

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