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Looming Job Cuts

The US unemployment rate rose to 5.7% and we asked our GlobeSt.com viewers for their thoughts on how job cuts will affect vacancy rates. The hefty majority (67%) told us they feel dark days are upon the office market, while 33% didn’t think the cuts will make a difference on vacancy rates. Richard Persichetti, the client services manager at Grubb & Ellis, tells GlobeSt.com he thinks the reality will be in the middle. Here’s what else he had to say:

“I definitely don’t think layoffs spell doom for the office market. That’s not to say it won’t have an effect. It’s going to have an effect on vacancy. It’s obvious that job growth is negatively correlated with vacancy rate, because if you have job increases vacancy goes down and if you have layoffs vacancy goes up.”I can’t see how it’s that bad when every week you’re still hearing about deals being signed north of $150 per sf. New York is still the greatest city in the world and there are plenty of opportunities on every corner. Last year, the vacancy rate hit a 25-year historical low. With little new supply being delivered over the next few years, if vacancy does increase you’ll just see more equal balance in negotiations between landlords and tenants. The playing field will be even. I don’t see this as negative, just a balancing between landlord and tenant.”Employment is the primary driver for real estate. There’s no way to lose jobs and not see an increase in vacancy. “Looking back historically from 2000 to 2003, there was a 5% drop in New York City office jobs which increased the vacancy rate by 4.8% and rents over that time dropped more than 30%. I do not think there is going to be the same issue this time. You will see vacancy increase and rents drop, but not at that magnitude. The number one reason for that is after 2000 and the dot-com bust, firms grew smarter and didn’t hire as aggressively or overhire. The job losses should be less this time. Firms took less space this time, so they’re better equipped to handle any type of job losses. “Bear Stearns will have some impact. As a positive, tenants will see Bear’s space as a value opportunity whereas they might move into a sublease that they can get for 15 to 20% cheaper than they could in Midtown Manhattan. As far as its effect on vacancy, it’s hard to determine and depends who takes the space. If it’s a company that moves out of one building to take the same amount of space in another, it balances out because they would have moved somewhere else. That space is going to be highly sought after because of the value play it will have in the market.”We’ve already seen sublease space increase over the past six months by approximately 1.5 million sf coming on the market. Sublease and direct space have basically been in step with each other over the past six quarters. The sublease space, unlike previous declining cycles, hasn’t impacted market overall. In the last declining cycle there was a blitz of sublet space that hit the market so what happened was the split was about 60% and 40% sublet. So you had sublet space directly competing with direct space in 2001 through 2003. This time around, direct and sublet space hit the market on even keel so you’re not seeing so much direct competition between the two.”Firms basically don’t need any more space because they’re not hiring. They’re not taking more space but they’re not getting rid of it.”

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