The Expert: How Q4 Compares

The office market lies in the path of a deepening recession, and market fundamentals are softening, though at a moderate pace. The rate of deterioration is more like an orderly retreat than a rout, at least so far.The vacancy rate ended 2008 at 14.8 percent, an increase of 50 basis points in the fourth quarter and 180 basis points for the year. During 2001, when the economy was last in recession—from March to November of that year—vacancy increased by an average of 140 basis points per quarter. Net absorption totaled negative 2.2 million square feet in the fourth quarter and negative 3.4 million square feet for the year. During the opening four quarters of the prior softening cycle, by comparison, tenants gave back 77 million square feet of office space, another sign that the current cycle has been moderate thus far.Sublease space broke through the 100 million-square-foot ceiling for the first time since the fourth quarter of 2004. New York City led all markets with 11.8 million square feet of sublease space on the market, up from 6.3 million square feet at the beginning of the year when contracting financial services companies sought to monetize newly emptied space.The weighted average asking rental rate for Class A and B space ended the year at, respectively, $35.80 and $26.78 per square foot per year gross. During 2008, asking rates dropped 1.6 percent for Class A space and 1.5 percent for Class B space. Effective rates were off more sharply as landlords traded rent for occupancy, in the form of generous free-rent periods and tenant-improvement allowances. In some markets, landlords reduced their asking rates, and in other markets, they kept asking rates intact while relying on lower “whisper rates” to attract reluctant tenants. For the most part, tenants were having none of it, getting short-term extensions when their leases expired so as to keep their long-term options open. For tenants whose leases expire in a year or two, “blend and extend” offered a win/win strategy. Tenants benefited from immediate rent reductions for the remaining terms of their leases, and landlords benefited by signing tenants to new long-term leases.