MILWAUKEE-Shrinking payrolls could mean shrinking tenant bases for a number of office markets nationwide, especially those with heavy concentrations of financial industry workers, according to a new report from Robert W. Baird & Co.

David AuBuchon, senior research analyst for the Milwaukee-based company, tells that “I doubt any market in the US will show material rent growth this year.” Logically, some will be hit harder than others by the financial markets turmoil that began with the subprime housing loans and has spread throughout the economy.

AuBuchon cites government employment data and other economic reports to show that “we are in the midst of a weakening office environment.” He estimates that the downturn, which began in late summer 2007, could last another six to 12 months, a period that he describes as shorter than typical for such a slump.

AuBuchon’s report warns of potential problem markets New York City, Chicago, suburban New Jersey and Connecticut. It also points out some markets are showing strength because they are significantly less dependent on finance-related tenants. Among those are San Diego, Seattle, Tampa Bay, Houston and Atlanta.

The impact of the job losses on office market rent growth and vacancy will likely be milder in this downturn than the previous cycle, when the technology crash of 1999-2000 severely walloped a number of US markets. Among the factors AuBuchon cites for the milder impact this time around is “the general lack of excess supply in most markets.”

AuBuchon cites statistics showing that office payrolls continued to deteriorate, posting the third consecutive negative month and seven declines in eight months. Also, payrolls in the business services sector “have begun to weaken materially revealing a third consecutive down month, the first such sequential decline since February ’01,” he concludes in the report. Overall, office payrolls have lost 91,000 jobs in 12 months and 232,000 jobs since July 2007.

Although the report focuses on office payrolls, it points out that the payrolls “are not an exact predictor of the office market” because existing vacancies, anticipated supply growth and projected rent growth all play a role in shaping the office market. Another factor is sublease space. The US office market is “already seeing anecdotal evidence that sublease space is resurfacing,” AuBuchon tells The sublease space, if it continues to grow, will suppress rent growth as it competes with direct space and offers lower rates.

AuBuchon, however, also points to uncertainty regarding the depth and duration of the economic slump, the payroll cuts and their impact on the office market. “The financial roots of the global economic slowdown have created an environment with mass layoffs and cost-cutting measures that could hurt those markets and REITs,” he says. “Recent wild variations in the financial payroll data are evidence of the uncertainty.”

Until those wild swings dissipate, AuBuchon believe markets and building owners that depend significantly on finance-related tenants “have incremental risk in the near term.” His report examines the Top 25 office markets, based on total square footage, in analyzing the impact of job losses on those office markets. Just as job losses foretell a slumping office market, he says the first sign that the downturn is reversing will be a quarterly increase in office payrolls.