Office Tenants Will Have Upper Hand in 2009

January 7, 2009
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The office construction pipeline contained 90 million square feet at year-end 2008, the lion’s share of which will be delivered in 2009. This combined with a projected 45 million square feet of negative absorption, including a big jump in sublease space, will push vacancy up by 2 percentage points to end 2009 at 16.5%, and give tenants greater negotiating leverage, says the 2009 Global Real Estate Forecast issued by Grubb & Ellis Company.

Tenants should expect to see concession packages becoming more generous as this year progresses. The growing inventory of sublease space will put downward pressure on asking rent rates for direct lease space, which are expected to decline in the range of 4% to 5% for both Class A and B space by year-end.

“Employment growth drives demand for office space and the labor market will be shrinking in 2009,” says Robert Bach, senior vice president and chief economist at Grubb & Ellis. Two bright spots--government and healthcare--will be among the few sectors with growing demand for office space.

Strong office markets include: Washington, D.C.; Portland, Ore.; Los Angeles, Calif.; San Francisco, Calif.; Austin, Dallas, and Houston, Texas; Raleigh-Durham, N.C.; and Boston, Mass.

New York City is already starting to feel the pinch. Commercial rental rates in the city have fallen faster than at any time in the last 20 years, according to The New York Times. Analysts are reporting that the going rent in Manhattan declined 4.4 percent from the third quarter to the fourth quarter. And in Midtown, the heart of NYC, the rate drops are even more pronounced at 8.3 percent.

New York City brokers are still busy showing space but are having a tough time with actually closing deals. In the last quarter of 2008, only 5.4 million square feet of space was leased, well below the quarterly average of 7.2 million square feet.

There’s also a steep decline in office refurbishment. In the past, new tenants were quick to remodel, regardless of how suitable it was. But now, the trend is moving toward saving money by accepting space “as-is.”

Sources: Grubb & Ellis Company; NY Times