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SAN JOSE, CA-The stock market may be inching upward, but the economy has not yet hit bottom, according to a second quarter market report by CRESA Partners San Jose, a corporate real estate advisory specializing in tenant representation.

Company Principal Scott Kinder says that even when the recession can be declared officially over, it will take the commercial real estate market in Silicon Valley and the Bay Area at least another six months to begin its recovery. “And when the recovery begins, it will likely be painstakingly slow since there is so much space to be absorbed,” he adds.

As it stands, space continues to be added to the supply of office, R&D, and warehouse sectors due to continued consolidation and mergers in the Valley and the Bay Area, says Kinder. “It’s gotten to the point that some large, short-term subleases (12-18 months) are now being offered for free (operating expenses only),” he says.

Rents for class A office buildings during the past two quarters have averaged $27 per SF in Downtown San Jose and $23 in the suburbs; R&D space now averages $12 per SF. Rents are expected to decrease slightly for the next two quarters, according to Kinder, likely reaching 10-year lows throughout the Valley by the end of the year.

The vacancy rate for class A buildings in the CBD rose to 21.5% during the second quarter and in the suburbs it rose to 25%. When unoccupied office space that is not on the market is factored in, those percentages rise by another 10%, according to the report.

Given the situation, CRESA Partners Principal Mark Pearson says tenants should be negotiating for market concessions such as free rent, greater tenant improvement allowances, reduced parking rates, after-hours HVAC, and cancellation and expansion options. “Tenants who are able to determine their long-term space requirements are in the best position in many years to exploit current market conditions,” he says.

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