The Expert: Vacancy to Rise Through 2009

Even with the $700 billion relief program and the very low 1 percent federal funds rate—down by 425 basis points in a little over a year—a quick recovery is not likely. The instability in the credit markets could last through most of 2009 for two reasons: Home prices show no signs of hitting bottom, and until that happens, banks will not know the full extent of their losses. Additionally, delinquencies and defaults are just beginning to rise in other loan categories, such as corporate, consumer and commercial real estate loans.As a result, credit will be tight and expensive in 2009, and the broader economy will struggle. Expect total payroll job losses from 2.5 million to 3 million by year-end. Consumer spending will be challenged, and export related businesses, which benefited in 2007 and 2008 from the sliding dollar and strong global demand, will see those two props removed as global growth slows. Gross domestic product is projected to shrink by 1 percent in 2009, compared with growth of 1.3 percent in 2008 and 2 percent in 2007. Businesses will be conservative with their capital spending and expansion plans, meaning translates into decisions put on hold until the economy turns up.The office construction pipeline contains 94 million square feet under way at the end of the third quarter, the lion’s share of which will be delivered in 2009. Add in about 50 million square feet of negative net absorption, and the vacancy rate is expected to rise by two percentage points to end 2009 at 16.5 percent. Negotiating leverage will shift in favor of tenants with concessions packages looking more generous as the year progresses.