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OAKLAND, CA-Despite slowing job losses in the second half of the year more office jobs will be lost and vacancy will climb as the year wears on, further lowering market rents. Factor in an increasing number of distressed debt sales in 2010 and 2011 as rental revenues continue to decline and short-term loan extensions mature, and it appears that office market fundamentals will continue to suffer well beyond the official end of the recession.

That according to Susan Persin and Matt Anderson, co-owners of Foresight Analytics, an Oakland-based national advisory firm providing real estate market analysis and projections for investors, lenders, and developers. The duo has decades of experience in real estate market analysis; capital markets research; modeling and forecasting; and special project work for REIT IPOs, large property sales and strategic planning. The prediction is laid out in a summary of their mid-year office report and forecast.

It’s certainly possible there could be a quick recovery, Persin tells GlobeSt.com, but with more than one million office jobs lost year-to-date and the year-end total expected to top 1.5 million, it’s not at all likely because a quick recovery would require real job growth, not just a lessening of the job losses, for businesses to need more space, thereby lowering vacancy and stabilizing rents. As is, most requirements being fulfilled are resulting in no net absorption or negative net absorption and lower rental revenues, which won’t stop the red ink from bleeding onto the page.

“We believe that market deterioration will slow in 2010, but that real market improvement is several years away,” Persin forecasts in her summary. “We expect a greater volume of still-distressed loans maturing in 2010 and 2011, potentially resulting in several additional years of weak office values.”

During the first half of 2009 business reacted swiftly to the recession by slashing jobs and shrinking their leaseholds, which caused the US vacancy rate to jump over 16% from closer to 14%. “Losses we anticipated would take place throughout the year were weighted to the first half,” Persin says. “As a result we do not expect the second half to be as bad as the first half—not saying markets are going to start to improve, just that it won’t be a doubling down on the first half.”

Asking rents, however, fell only 4.4% through the first half of the year, with owners opting to increase concessions such as free rent rather than lower face rates. “Landlords will become more focused on doing deals and will lower rents so that they are better aligned with market conditions,” she predicts. “Leasing activity will increase as tenants shop for better lease terms and renegotiate leases at better rates.”

As tenants take less space at lower lease rates income from properties is falling, creating distress for highly-leveraged owners. Commercial mortgage delinquency rates have more than doubled from one year ago, to 4.1% from 1.9%.

The relative dearth of office sales transactions from January 2008 through June 2009 was in part the result of mismatched buyer and seller perceptions of building value and a lack of available financing, she says. Another part was lenders opting to offer short-term extensions for maturing loans, hoping that markets will strengthen before they have to recognize losses.

Office sales are now on the rise, however, “and will rise further as distressed sellers adjust their expectations downward.”

Generally speaking, new supply has been less a factor than in past troughs with many projects having been delayed or canceled. Office construction is running 30% below year-end 2008 numbers, according to Foresight.

The exceptions are markets like the greater Seattle area and Miami where a lot more large office projects obtained financing commitments before the spigot shut off. As a result, those two markets are at the top of Foresight’s Watch List, which takes into account forecasted year-end vacancy, the forecasted change in vacancy and rents over the second half of the year due to lost jobs and new supply.

Also atop the list are the Inland Empire, Phoenix, Baltimore, Washington, DC, Portland, OR and the Silicon Valley. Texas is still showing some resilience in the office sector, Persin says, but they’ve had a big increase in residential problems more recently, which could mean they are just getting into the cycle later.

“Commercial real estate hasn’t been hit as hard yet as the residential market,” she says. “Some are saying it’s the next shoe to drop.”

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