Exclusive: Office vacancy to fall slowly next year: report

By Ilaina Jonas

NEW YORK (BestGrowthStock) – The U.S. office vacancy rate is expected to peak next year at about the same rate as it did in the last downturn, but high unemployment and vacant space that companies are retaining are likely to drag out a recovery, according to CBRE Econometric Advisors.

Rebounds in demand for U.S. office space, and for warehouse and distribution centers, are expected to be sluggish but for different reasons, according to two reports by the research arm of real estate services company CB Richard Ellis Group Inc.

Anemic employment and leased but unused space is expected to crimp the decline in vacancies for U.S. office space. Meanwhile, slow growth in retail spending is expected to weigh on demand for warehouse and distribution centers, also known as industrial real estate. In both cases, rents will not rise until vacancy declines.

The U.S. office vacancy rate is expected to peak in the middle of next year at 16.8 percent, as it did in 2003, and is expected to fall very slowly to 16.4 percent by the end of 2011 and to 15.3 percent by the end of 2012, according to CBRE Econometric Advisors.

Real estate research firm REIS Inc also sees a slow office recovery. REIS sees the U.S. office vacancy rate peaking at 17.7 percent at the end of this year and then slipping to 17.4 percent by the end of next year.

“There’s nothing in the job market that’s pointing to a quick lease-up of space,” said Victor Calanog, REIS director of real estate.

Leasing has picked up in key markets of Manhattan and Washington, D.C., helping large landlords there such as Vornado Realty Trust, Boston Properties Inc and SL Green Realty Corp. (Graphic on the U.S. office market: http://r.reuters.com/wyc98q )

Still, with persistent high U.S. unemployment, demand for office space nationwide is expected to continue to be uneven as tenants’ appetites for more space remains weak, according to CBRE-EA Senior Economist Arthur Jones.

“Since office space is the ‘economy in a box,’ continued job growth is key to the market’s ongoing recovery,” he said.

That is likely to translate into a spotty and sluggish recovery for the office sector.

Unlike other recent slumps, the downturn that started in late 2007 is the result of a broad-based economic recession and widespread unemployment. About 2.5 million office jobs have evaporated over the last several years, Jones said.

Unlike the commercial real estate collapse in the 1990s, the current downturn is not the result of overbuilding.

Nor is it similar to the downturn of the early 2000s, when the collapse of the tech bubble drove many companies out of business and their financial backers and advisors to lay off workers and sublet extra space.

In both those downturns, unused space was pushed out onto the market.

IT’S THE SHADOW

Not so much this time. Companies learned their lesson from a few years ago, when a recovery forced them to release space at higher rents. This time around, many companies laid off staff but did not let go of the space. That has left much “shadow space” that is leased but unused. It doesn’t show up in the vacancy rate.

Although not an exact science, shadow space can add another 5.0 to 7.0 percentage points to the current 16.6 percent vacancy rate, Jones said.

When employment growth returns, tenants are expected to refill shadow space and maybe put some back on the market when they have a clear view of their space needs.

“As that happens, you’re going to have this space gradually come to the market,” Jones said. “Some of it will be absorbed. That’s going to pick up very slowly but not enough to measurably bring down the vacancy rate until end of 2011.”

INDUSTRIAL NEEDS MORE CONSUMER POWER

In a separate report, CBRE Econometric Advisors said it sees the availability rate for industrial real estate to fall to 13.1 percent in 2011 from 14 percent in the third quarter of 2010.

The availability rate is space that is vacant plus space that is expected to be vacant within six to 12 months. It peaked at 14.1 percent in the second quarter 2010.

Although demand for warehouse and distribution center space has rebounded as companies restocked their depleted inventories, much of that has been in the automobile sector. Retail inventories remain very lean because consumers are still paring down debt instead of spending at levels seen three years ago.

Until consumer spending rebounds, the availability rate is expected to remain high. CBRE Econometric Advisors said it expects the availability rate to decline throughout 2012 and end the year at 11.8 percent.

Exclusive: Office vacancy to fall slowly next year: report