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ONTARIO, CA-Not so long ago, concessions were almost unheard of in the mainly robust office markets around the US, such as the Inland Empire office market surrounding Ontario. But local and regional office market reports lately are talking about them more and more as building owners turn to free rent and other concessions that haven’t been seen in some time.

A Grubb & Ellis report on the Inland Empire office market, for example, forecasts that building owners “will offer tenant concessions and developers will reduce future project phases until the local economy remedies itself.” The report bases its outlook on the fact that the Inland Empire office sector “took its first negative absorption hit since the mid-90s” during the first quarter. Along with a vacancy rate inching close to 15%, sublease space rising and construction deliveries adding to the inventory, the report concludes that the trends add up to concessions for tenants.

Rising concessions are already being reported for a number of office deals throughout the country, including a recent series of leases at 1500 Walnut in Philadelphia. The 325,000-sf, 22-story twin tower office building landed 9,303 sf in new deals by using free rent and capital improvements to win over smaller businesses.

One of the strongest office markets in the country before the subprime meltdown was Orange County, where asking rents kept rising and concessions were unheard of for years. But now, according to the latest reports, after the county’s office market posted more than 1.1 million sf of negative absorption in the first quarter, asking rates are leveling off and building owners are more willing to negotiate than they were a year or two ago. Forecasts say building owners most likely will offer more concessions in the form of free rent, reduced parking fees, more generous tenant improvement allowances and relocation fees as the year goes on.

In Chicago, office space surveys by major brokerage firms show suburban submarkets are shifting to a tenants’ market. Market experts say building owners are poised to start offering more concessions. As is often the case when markets weaken, Chicago owners are expected to boost concessions rather than reducing rental rates as a means of keeping rents at higher levels although the effective rate works out to be lower for tenants.

Even in Manhattan, one of the nation’s strongest markets, market observers are conceding that free rent and some other concessions are on the horizon because of the impact of the subprime meltdown on the city’s many financial services companies. Marc Holliday, CEO of New York City-based SL Green, an office REIT, said in a recent earnings call that his team believes the leasing market in New York City will soften as a result of the lack of financial services firms’ participation.

Holliday estimated net effective rents could drop 10% to 15% from their peak levels. In addition, he said, “there could be some widening of free rent to give some tenants relief from the sticker shock that they might feel when they roll over from the old rents to today’s market rents.”

In general, market reports across the country say that the extent and types of concessions will vary from submarket to submarket within a region and even from building to building. In other words, weaker buildings in weaker markets will have to resort to concessions more than their stronger counterparts in stronger markets.

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