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SAN FRANCISCO-According to a new national report on the commercial real estate market by Merrill Lynch, the Bay Area is considered a “distressed market”, meaning that the imbalance between supply and demand for office space is so high that market rates will probably stay depressed for many years to come.

The Merrill Lynch report labels nearly half of the 86 markets that it studied as distressed, including the Bay Area and Southern California. It indicates that the national office vacancy rate rose from 15% at the end of 2001 to 17% at the middle of 2002. In addition, statistics show that there is little hope for a recovery in the next 18 months. In fact, vacancy rates may hit 18% by the end of 2003, says Merrill Lynch.

Merrill Lynch reports that the lack of demand for space is the major cause of the gloomy office market, with nationwide demand shrinking about 4.5% in the last 18 months. Landlords are competing for tenants, which is leading to decreases in rental rates.

According to Grubb & Ellis’ 3rd Quarter 2002 office market report, office demand in San Francisco actually turned positive for the first time in two years, with vacancy rates dropping slightly to 21.9%. However, lease rates also dropped. The average asking rate for San Francisco’s finest office space is about $30 per sf, which is more than $30 less than it was two years ago.

Grubb & Ellis also reports that, even with the slight dip in vacancy rates, there is still a whopping 14 million sf of vacant office space in the city, and about 900,000-sf new space about to come on the market.

According to Merrill Lynch, if new projects do not come to a complete halt in the next few years, it will be years before distressed markets, including the Bay Area, see any kind of recovery.

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