SANTA ANA, CA-Just when the job market will abate will have a big impact on when the softening in the US office market slows, according to a new report. The first look at the second-quarter US office market shows that the market “has settled into an aggressive softening cycle, the length of which will depend on when job losses dissipate,” according to the new report from Santa Ana-based Grubb & Ellis.

The summary of market conditions, by Grubb & Ellis senior vice president and chief economist Bob Bach, cites a number of statistics illustrating the continuing decline in the market, ranging from rising vacancies to falling rents to increases in negative net absorption throughout the country. The figures show that New York City led all other markets on the downside by giving up 3.3 million square feet of occupied space to negative net absorption in the second quarter.

In his forecast for the office market, Bach describes a sequence of events that “seems plausible,” depending on when job losses abate. First in the sequence is that GDP turns positive in the second half of 2009. Next, the labor market bottoms out in mid-2010 but growth is negligible until 2011. Next, vacancies peak and begin to turn down in the first half of 2011. Then rents bottom out and begin to turn up in the second half of 2011.

“The strength of the office market recovery in 2011 and beyond will depend on the strength of the labor market recovery, which most economists expect will be weak,” the forecast states. The Grubb & Ellis report says that a forecast based on the loss of office jobs (information, finance and professional and business services excluding temporary positions) through the middle of next year “suggests that the vacancy rate could rise above 20% in the first half of 2011 from its mid-2009 reading of 16.6%.”

One of the big questions about the market is when it will hit bottom. Asking and effective rental rates may decline another 10% before they reach bottom sometime in 2011, according the forecast.

The report cites what it calls “a hopeful sign” regarding sublease space. It points out that the inventory of available sublease space in the US added a negligible 1.4 million square feet in the second quarter, by far the smallest quarterly gain since the market began to soften.

In each of the previous two quarters, sublease space had increased by an average of 10.2 million square feet. “The sudden leveling off is one more indicator that the financial panic of last fall and spring has subsided,” the report states. The sublease inventory totaled 113 million square feet at the end of the second quarter, its highest level since 2004-Q1 but well below the previous peak of 146 million square feet recorded in 2002-Q1.

While some of the specific statistics vary, the Grubb & Ellis report and studies by other real estate services firms are showing the same general results for the second quarter. As CBRE Econometric Advisors (formerly CBRE Torto Wheaton Research) stated in a recent report, “Vacancy rates in the US office, industrial and retail property markets continued to rise in 2Q 2009.” Said Arthur Jones, senior economist with CBRE Econometric Advisors, “Commercial property markets are reflective of the economy and the second quarter highlights the continuing impact of the recession on property markets nationwide.”

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