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LOS ANGELES-Job losses here and in the rest of the US remain one of the biggest obstacles for the office market, and office construction loans promise to produce more problems for banks. These are some of the conclusions in two recent reports, one by Marcus & Millichap and the other from CBRE Econometric Advisors, regarding the forces shaping and being shaped by the US office market.

The Marcus & Millichap report is a study of the Los Angeles office market that points out that office-using employment in the L.A. market has contracted by more than 8% with the loss of nearly 90,000 positions since the onset of the recession, and that employers are forecast to thin payrolls by 3.4% for the full year in 2009, cutting 135,000 jobs. Last year, 138,700 workers were let go, the report points out.

Among other points, Marcus & Millichap notes that office completions will slow to 1.2 million square feet by the end of this year, down from nearly 1.4 million square feet last year, which itself was a modest year in terms of new completions in the L.A. market. “Negative net absorption is expected to total 4.7 million square feet this year, after tenants returned 4.6 million square feet of space to the market in 2008,” the study says. As a result, vacancy is forecast to rise 2.5% to 13.4% by year end.

Among the effects of the rising vacancy will be a further decline in asking rents. The report forecasts that asking rents will retreat 5.6% to $32.52 per square foot per year by the end of this year, while effective rents will fall 9.2% to $26.60 per square foot per year.

The CBRE Econometric Advisors report, by principal and director of forecasting Jon Southard, focuses on the problems in store for banks that have office construction loans outstanding. “In the office sector, the first area of distress is likely to be completing and recently completed construction,” the report points out. New construction is the area in which a pullback in demand for office space matters the most, and most construction financing is done by banks, the report explains.

The Econometric Advisors analysis emphasizes that there is not as much new construction today as there was in the 1990s, but “what construction there is today is just as distressed.” Among the statistical comparisons in the report: Nineteen years ago, more of the overall vacancy was in buildings that were more than 20% vacant and therefore likely distressed in their inability to service debt.

Despite the differences between this recession and the previous downturn, the report states: In short, there will be plenty of distressed borrowers—and therefore distressed loans—due to income shortfalls alone. Write-downs resulting from these problems “will likely push some additional banks into failure, as many smaller banks are highly concentrated in commercial real estate loans,” the report says.

The CBRE Econometric Advisors study points out that bank analysis “is not something we do here.” However, it concludes, “It would not be surprising if the number of additional failures matched the failures so far, given the loss reserves required and the experience of banks in the 1990s.”

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