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SAN FRANCISCO-Office markets here, in New York City and in Orange County all struggled to varying degrees in 2008 as job losses and a weak economy produced higher vacancies and declining rents in what have traditionally been some of the strongest US office markets. The Downtown San Francisco office market posted its worst occupancy losses in more than seven years, according to a year-end report by CB Richard Ellis. Orange County posted its second straight year of negative net absorption in what was once one of the country’s strongest office markets, and even the ever-solid New York City office market weakened in the fourth quarter as a result of the relentless economic forces affecting the demand for office space.

Reports from national and regional brokerage firms, along with observations from brokers and researchers who study those markets, paint a picture of generally weakening US office market conditions, even in some of the historically strongest markets and submarkets. One of the chief factors affecting the markets is the continued trimming of payrolls by US firms, which cut 524,000 jobs in December, according to the latest figures from the US Bureau of Labor Statistics.

The December figures closed out a year in which employers shed more than 2.5 million jobs, with 1.9 million of those losses in the last four months of 2008. A Grubb & Ellis report pointed out recently that standard office space, where demand is directly linked to office jobs is particularly at risk from the job losses. Office tenants require approximately 175 square feet per job, so the mounting job losses ultimately affect vacancy, which in turn affects rents.

Manhattan’s office market has slowly been turning as a result of the recession, and in the fourth quarter, the impact of the downturn began translating into steeper declines in asking rents. Market reports also show that investment sales activity, which was already off in 2008, also slowed more in the last three months of the year. Jones Lang LaSalle puts Manhattan’s overall vacancy rate at 10.2% for Q4, up 43% from a year earlier and the highest since 2004. C&W’s Q4 report puts the island’s office vacancy rate at 8%, but does use the 43% figure to describe the year-over-year increase in available space.

In San Francisco, negative net absorption in the Downtown market in the fourth quarter totaled 1.4 million square feet–its highest level since the dot-com crash. Total availability grew by 1.7 million square feet, pushing the Financial District’s direct vacancy rate up 240 basis points to 12.6% and the overall availability rate, which includes sublease space, to 16.2%.

CBRE, which represents tenants and building owners, is predicting that the first half of 2009 will feel much like the end of 2008. “While a significant level of lease roll in the second half of the year may lead to increased activity, continued hesitancy on the part of tenants to commit to leases in the near-term will likely lead to a continued trend of increasing vacancy and negative absorption for at least the first half of the year,” a CBRE report states. In response, the development pipeline in San Francisco has been largely sealed off. While 1.8 million square feet of space was delivered this year–the busiest year since 2002–only 400,000 square feet of new space will be delivered in 2009, all of it for life sciences tenants, and only 210,000 square feet is currently slated for delivery in 2010, according to CBRE.

In Orange County, the average asking rate for office space sank to 2006 levels as the county posted its second straight year of negative net absorption. The county finished the year at an average asking rate of $2.47 per square foot in the fourth quarter, down from its peak of $2.77 in 2007. The drop in the asking rate reflects a continuing downturn in the fortunes of the county’s office market, which was one of the first to reflect the mortgage and financial industry downturns. The market began to weaken when subprime mortgage companies vacated huge blocks of space in early 2007, and–like office markets throughout the country–it has since had to battle the US recession and the financial industry meltdown.

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