Tough Job Market Promises Impact on Occupancies, Rent Growth

With the office sector marred by a floundering job market, the National Association of Realtors anticipates a vacancy rate of 14.4 percent in the second quarter of next year, up from 12.9 percent for the same period this year, according to its latest Commercial Real Estate Outlook. Annual rent growth should continue to shrink, having averaged 8 percent last year and likely dropping to 3.2 percent this year and actually turning negative by 0.4 percent next year as net absorption hits an expected 14.7 million square feet in 2008 and 10.9 million in 2009–a far cry from the 57.3 million square feet of 2007.Slowdowns in tenant demand and leasing activity have plagued the sector, noted a report from Jones Lang LaSalle Inc. Tough economic climates, increased construction costs and weakened demand prospects hampered office construction starts in most markets, but the suburbs were hit particularly hard. Suburban markets did, however, experience an uptake in occupancy of existing buildings. On the other hand, the major urban cities of New York City and Denver ranked at the bottom of the occupancy list, with the largest drops in occupancy rates. While Jones Lang LaSalle forecasts that companies will continue to tighten their belts, it does not expect occupancy decreases to equal 2001’s drop-offs. Moreover, it expects lease expirations to spur most of the demand for office space for the rest of the year, and–as to be expected–that cost will remain a key element when it comes to making real estate decisions.