Office Vacancies Aren't Recovering

commercial real estate

Someone forgot to tell U.S. office property about the rebound. According to the research firm Reis, U.S. office vacancies just hit 17.2%, their highest level since 1994. In the first quarter of 2010 alone, 11.6 million square feet of office space went vacant.

Rental rate declines may have stabilised, as they fell just 0.8% from the fourth quarter, but they remain down 7.4% year over year if you include free rent and other incentives land lords had to pull out in order to keep tenants.

Reis director of research Victor Calanog has explained that:

“As labour markets stabilise, we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given typical lags in commercial real estate… Even as occupancy continues to deteriorate, we’re observing signs of renewed leasing activity across different metros.”

“While we do not foresee positive rent growth resuming until next year at the earliest, office buildings at least do not seem to be experiencing as much distress relative to 12 months ago, when we were just heading into 2009 and most markets and economies around the world were still in deep turmoil,”

“We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise… This is bad news for loans supported by office properties that have to contend with at least six to eight more quarters of falling income.” (Via Reuters)

The hope is that the slowing rate of deterioration (‘second-derivative’ improvement) could eventually lead to an outright recovery. Problem is, we might have to wait until 2011 before seeing evidence of this.

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