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OAKLAND, CA-This downturn is different because office job losses in 2008 and 2009 will climb to levels not seen in decades and, in most markets, lack of demand will drive market deterioration. Moreover, the losses of office jobs and demand are not concentrated in specific markets as it was during the dot-com bust earlier this decade.

That is the conclusion of Foresight Analytics, a locally based company that provides national real estate analysis and projections. The company’s Office Market Outlook, prepared by company principal Susan Persin, forecasts that the greatest impacts from job losses and new construction will be felt in 2009 and 2010.

“Basically what we tried to do is figure out how bad things could potentially get in 2009 given our jobs forecasts,” Persin tells GlobeSt.com. “What stands out is that until recently, many of the selected markets highlighted in this report boasted strong expansion. In fact, a downturn is not yet evident in some markets. Most are now facing abrupt turnarounds, with further weakening expected.”

In many markets, new supply is less of a factor than during previous downturns, but supply will have an important impact in some markets, including Charlotte, Seattle, and Washington, DC, she says. “As competition for tenants increases rents will decline and lease concessions will increase in almost every market. Poor fundamentals that have reduced building values–and the ongoing credit crisis, which has limited buyer competition–could create distressed investment opportunities,” states the report.

In a nutshell, vacancies are increasing and rents are dropping as the weak US economy takes its toll on office markets. As a result, strong rent growth that was projected when buildings were purchased by aggressive buyers in recent years is not materializing.

“Tenants, especially those in finance or mortgage-related businesses, are consolidating or shutting down,” states the report. “As demand for office space decreases, both direct and sublease availabilities are growing, and net new leasing activity is down. The result is higher availability and some of the worst office market fundamentals since the dot.com bust.”

Countering analysts claiming that office markets are not in jeopardy because markets are not overbuilt or because planned projects have been delayed or cancelled, Persin argues that the US is facing unprecedented job losses in sectors that occupy office space. The nation lost an estimated 900,000 office jobs during 2008 and is set to experience a deeper decline of 1.2 million to 1.5 million office jobs during 2009.

“Lost jobs will have the greatest impact in metro areas like New York, with a significant financial base, as well as Southern California, some parts of Florida, and Phoenix, which are among the areas most impacted by the housing market downturn,” Persin says. “Although these areas will be hardest hit, it is important to note that job losses are having a widespread impact across every market in the nation, as opposed to the early 1990s, when job losses were more localized. Lost jobs will result not only in a lack of new demand, but also in significant give-backs of currently leased office space in markets around the nation.”

Despite the lack of overbuilding and the delay or cancellation of many planned projects, there was still more than 80 million square feet of office space under construction at the end of 2008 that will contribute to market availability when completed. Among the markets with the greatest amount of new construction (as a proportion of existing inventory) underway at year-end 2008 were Charlotte, Miami, Seattle, and San Jose.

“Distress among owners, especially those who purchased buildings in the peak years of 2006 and 2007, is growing as property values fall in the wake of reduced income,” states the report. Indeed, commercial mortgage delinquencies climbed to an estimated 2.7% in the fourth quarter of 2008 and are expected to jump to 4.3% by year-end 2009.

Following is an edited version of the foresight’s prediction for selected markets on Foresight’s US Office Market Watch List accompanying this article:

New York: The largest metro area in the country with 400 million square feet of office space will lose an additional 100,000 office jobs in 2009 that, when combined with 9 million square feet of new construction (some of which is slated for delivery in 2013 and beyond), Manhattan’s office vacancy rate could climb to the 14% range, and rents will fall about 15%. Downtown is at greater risk than Midtown or Midtown South.

Washington, DC: The nation’s second largest office market still showed job growth at the end of 2008 but 12 million square feet (4.2% of available inventory) was under construction at the start of the year. The metro is slated to lose almost 18,000 office jobs during 2009, which would add 1% to vacancy. The combination could push vacancy up to 16% and rents down 10%. Within the metro area, the District of Columbia will stay significantly stronger than Northern Virginia or Suburban Maryland.

Chicago: The third largest office market (214 million square feet) is expected to lose 34,000 office-occupying jobs this year, which could add 2.4 percentage points to vacancy. A construction pipeline of several million square feet will result in additional space added to the market, which has the potential to grow vacancy by 4.2% and hurt rents to the tune of 10% to 15%. The losses are significant but the metro does not rank among the nation’s worst performers or among those with the most drastic changes.

Miami: Office is about to pile onto the poorly performing residential market here. Employment decreased 2.6% in December 2008 from positive 0.4% one year earlier. Office jobs lost could result in a 3.0-percentage-point increase in vacancy to 25% when combined with the 3.4 million square feet of new construction (7.6% of inventory). Vacancy at this level will lead to a sharp decline in rents of 20% or more during 2009.

Southern California: While there is little new construction to fret over, job losses here will have a significant impact on vacancy. Office vacancy in Riverside-San Bernardino could surge to almost 40% during 2009. Similarly, job losses in Los Angeles and Orange County will cause vacancy in these markets to climb to an estimated 18.8% (Los Angeles) and 21.5% (Orange County). Rents will fall 15% to 20% in these areas during 2009.

Silicon Valley While San Francisco proper does not stand out in the rankings, a slowdown in the tech sector is affecting this market. The metro economy lost 1.3% of its job base between December 2007 and 2008, versus a 1.1% job gain during the previous year. Significant layoffs have by Intel, AMD, Silicon Graphics, Sun Microsystems, Google, and Yahoo sent vacancy up to 17.2%. With 2.4 million square feet of new construction (5.4% of inventory) and 12,000 more office job losses predicted this year, vacancy could climb above 27% in 2009 while rents fall by only a slightly smaller percentage.

Phoenix:This market lost 86,800 jobs between December 2007 and 2008 but has under construction an amount equal to 4.2% of its stock, most of it in the suburbs. Deliveries could bring overall vacancy to about 25% in Phoenix during 2009 from 20.7% at year-end 2008. As a result, expect about a 25% decrease in rents for the year.

Seattle/Bellevue:The area will add 4.9 million square feet of new inventory (6.4% of supply), mostly in Bellevue, ad while much of it has been pre-leased by the region’s 800-pound gorillas they may not need it. Microsoft’s recent decision to cut 5,000 jobs and rescind a letter of intent to occupy 300,000 square feet downtown, plus the demise of locally-based Washington Mutual and Safeco’s merger with Liberty Mutual are adding sublease space to the market and curbing future demand. By year-end 2009 vacancy will be about 22%, up from 12.7% at year-end 2008, and rents will drop by more than 25%.

Charlotte:This office market measures 44 million square feet, making it a relatively small market. Despite recent job growth, the market’s lack of diversity and strong exposure to the financial industry, particularly Bank of America and Wachovia, will contribute to estimated 2009 office job losses of more than 12,000. Office vacancy could rise from 5.4% at year-end 2008 above 17% by the end of 2009, while rents will fall 10% to 15%.

Oil Patch Markets: With a history of boom/bust cycles, these markets are particularly at risk. Their housing markets maintained health through much of 2008, while markets around the nation crashed, leading many to believe that these areas were immune to national economic woes. However, after climbing to almost $150 per barrel in early July 2008, oil prices fell to the $50 to $60 range in November, and dropped to an average of about $40-$42 per barrel in December and January. Expansion by oil companies and demand for related services have decreased as the local economies have faltered, resulting in reduced demand for office space. Filling new buildings and/or backfilling office spaces vacated by existing tenants will be a challenge.

Dallas and Houston:Both metros saw employment growth in 2008 and are each expected to lose upward of 20,000 office jobs in 2009. In Houston, projects under construction total 6.5 million square feet or 4% of inventory, which when combined with the job losses could push vacancy to 20% from 13.5% at year-end, while rents decline 15%. Some 4.1 million square feet of new construction (2.3% of inventory) in Dallas along with its office job losses could push the vacancy rate to 27% from 22.3%, pushing rents down as much as 20%.

Denver:Another oil patch market, it could lose more than 10,000 office jobs during 2009 and will add 1.9 million square feet to inventory (2.0% of inventory). The metro could end 2009 with vacancy above 18% and about a 10% decrease in rents.

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