The Trends: Financing Constraints, Weak Demand Weigh Down Office Market

The third quarter was a rough road for the office market. Negative net absorption—19 million square feet returned to the market—along with 11.5 million square feet in completions, shot the sector’s vacancy rate from 13.1 percent in the second quarter to 13.7 percent in the third quarter, according to Reis Inc. The vacancy rate, presented during the firm’s third-quarter-2008 briefing, represents an upsurge of 60 basis points, the office market’s heftiest quarter-over-quarter increase since the second quarter of 2002.Just 10 out of 79 primary office markets saw their occupancy rates improve during the third quarter, a considerable drop-off from 45 markets in 2007’s third quarter. Detroit, marred by a challenging local economy, notched the highest vacancy rate, up 300 basis points from the same period a year ago to 23.9 percent. The top five markets by third-quarter vacancy rates were New York City (6.2 percent), the District of Columbia (8.1 percent), San Francisco (9.9 percent), Seattle (10 percent) and Nashville (10 percent).Meanwhile, the top five markets by one-year rent growth were Boston (13 percent), Houston (10.7 percent), New York City (9.1 percent), Los Angeles (9.1 percent) and Miami (8.4 percent). Reis Inc. chief economist Sam Chandan noted on the Webcast, however, that not one of the 50 largest U.S. markets is forecast to grow effective rents next year. “Over a five-year time horizon, markets will return to modest growth in gross revenue, but these gains will fall short of increases in expenses,” he said. “The constraints on financing and the gloomier outlook for office space demand continue to weigh on prices in the sector.”