The News: New Office Report Paints Picture of Growing Vacancy, Increasing Sublease Space

The continuing recession has driven up office vacancy rates, depressed rents and increased the amount of sublease space at an accelerating pace, according to a Jones Lang LaSalle Inc. report on the U.S. office market’s first-quarter 2009.Effective office rents nationwide fell 10 percent in the first three months of this year, and the amount of leasing activity also fell sharply, falling 31.5 percent from the fourth quarter of last year. It remained more than 48 percent lower than levels achieved in the first quarter of 2008. Some markets saw much sharper drops than that, topped by St. Louis with 84 percent, Fort Lauderdale  with 83 percent and Philadelphia at 60 percent. Some markets, however, did see an uptick in activity, including Denver, Houston, Chicago and the Silicon Valley. The report noted that the vast majority of deals that were signed involved extensions and/or renewals.The increased vacancy and absence of leasing velocity has resulted from the massive shedding of jobs, which began in 2008 and gained momentum in the first quarter of this year. At the beginning of the recession, these losses were largely confined to construction, manufacturing and finance but have now spread across the country’s economy, according to Jones Lang LaSalle vice president of research John Sikaitis. And, in contrast to other recessions, which did spare some metropolitan areas, almost all office markets have been hit hard this time around.The amount of sublease space also rose substantially, by 11 million square feet, during the first quarter of 2009. New construction also put downward pressure on vacancy, as more than 15.2 million square feet came online during the quarter. Markets that saw the most new deliveries include the Chicago central business district, Midtown and Downtown Manhattan, Seattle’s Eastside and suburban Houston, Philadelphia and San Diego.Some office markets bear close scrutiny, Sikaitis said. Increased Department of the Treasury activity and probable future expansion by the Securities and Exchange Commission make Washington, D.C., a market to watch, he said. And markets like Austin, Denver and the Silicon Valley may get a boost from growing rosters of green energy firms. Another market that Sikaitis is watching is New York City, as many banks and financial firms have still not put a great deal of space on the market for sublease.