DETROIT-The area office market has taken an even lower dip, says Matt Fenster of Paragon Corporate Realty Services. Vacancies are higher than ever, with property owners taking a bath on lease rates and most new construction will still be empty when it is finished, Fenster adds.

“While the market appears to have bottomed out during first quarter, vacancy rates continued to creep up and rental rates fell slightly,” he says. “Leasing activity remained flat and will likely persist through year end and possibly into first quarter 2003.”

Class-A vacancy rates for the Southeast Michigan office market climbed to 12.9% from 12.6% from the second quarter, though the number balloons up to 18.1% when including sublease space. Class-B vacancy rates are at 19.7% for the overall market, including 34.1% in Detroit.

Fenster reports property owners are scrambling to offer incentives to tenants to keep space filled. Tenants looking for bargain deals are exploring the available 2 million sf of sublease space, Fenster says.

“Since midyear, many landlords have allowed tenants to renew leases at low rates for relatively short lease terms,” Fenster says. “They remained reluctant to lock in the low rates for longer terms, hoping to renew them in a stronger market.”

Few metro Detroit properties changed hands in the third quarter, Fenster reports, and some just saw false starts. Max Capital was supposed to purchase three major Detroit buildings; 150 W. Jefferson, the Penobscot and First National, but the company has backed out of the deals.

The third quarter saw no new construction begin, Fenster notes. Nearly 640,000 sf of new office space was being built in Farmington Hills, the I-275 corridor, Southfield and Ann Arbor, but only 25% of A2′s space was pre-leased. Office space was completed at Ford Field, the Detroit Lions new home, but 75% of the 109,770 sf of office remains available.

“The market for office real estate will not recover until corporations have built up cash reserves and feel able to take on the risk of expansion,” Fenster says. “Only time will tell how long this process will take.”