Office vacancy rate soars, rents fall
Commercial real estate seen trailing economic recovery
By Peter Grant
THE WALL STREET JOURNAL
April 4 — Failing and consolidating businesses continued to hemorrhage office space in the first quarter and rents fell at their fastest rate since 1991, a further signal that commercial real estate will lag far behind the economy’s recovery.
THE NATION’S businesses vacated a vast 26.4 million square feet in the first quarter, roughly equivalent to 12 Empire State Buildings, according to Reis Inc., a real-estate research firm. This so-called negative absorption, coupled with 13.5 million square feet of new development, pushed the national vacancy rate up to 14.7 percent from 13.6 percent at the end of 2001, according to data not yet released by Reis. The current vacancy rate is the highest since the end of 1994, when it was at 15.3 percent.
In an encouraging sign, though, the rate of vacancy growth and negative absorption is slowing from the high pace set in 2001, when technology companies and other businesses dumped a total 117.8 million square feet of space. In the first quarter, the vacancy rate grew by 1.1 percentage points, compared with the previous three quarters, when vacancy rose an average of 1.4 percentage points.
Also, despite the pressure on landlords, analysts and people in the industry aren’t predicting a repeat of the carnage the real-estate industry witnessed in the early 1990s, when creditors seized hundreds of office buildings. Back then the vacancy rate topped out at close to 20 percent, a level few expect the current market to reach. Also, properties these days aren’t as highly leveraged as they were then and interest rates are lower, giving landlords more lasting power.
But analysts say the continued buildup of vacant space spells more bad news for landlords, who increasingly are cutting rents to fill properties. “This is not a healthy situation,” said Lloyd Lynford, Reis’s president. “There’s a reasonable probability we haven’t seen the bottom.”
Asking rents declined 2.2 percent in the first quarter, but effective rents, which include such landlord concessions as free rent and tenant improvements, dropped 4.3 percent — the biggest quarterly reduction in over 10 years. Landlords typically are quicker to increase concessions than cut rents because buyers and lenders are more likely to use rents to calculate a building’s value.
“We’ve been able to hold the line on rents but there are instances where you’re spending more to put tenants in place,” said Mitchell Hersh, chief executive of Mack-Cali Realty Corp., an office real-estate investment trust based in Cranford, N.J. “This is a business where you have to keep your buildings full.”
The growing vacancies and drop in effective rents are chipping away at the bottom line of both big and small property owners. This year, Equity Office Properties Trust, Chicago, the nation’s biggest office-building owner, will likely see a 3.9 percent drop in its adjusted funds from operations, an industry measure of performance, said John Lutzius, analyst at Green Street Advisors, a Newport Beach, Calif., real-estate stock research firm. Mr. Lutzius is projecting a 6.2 percent decline for Highwood Properties Inc., a large landlord with many properties in Southeast cities that have been particularly hard-hit.
Mr. Lutzius and other analysts expressed surprise at the continued weakness of the market, which many expected to have shown more strength by this point. “This is horrible,” Mr. Lutzius said. “Until last year we never saw a quarter with negative net absorption for the whole country. Now we’ve had five quarters in a row.”
But for tenants looking for space, the market softness means huge savings. Sublet space in Boston is renting for about $35 a square foot, close to half what it was going for at the market’s peak 18 months ago, local brokers say.
In the Atlanta area, DocuCorp International Inc. is preparing to move its regional office to 100,000 square feet at Paces West, an Equity Office complex that has suffered high vacancy for more than a year. Equity Office agreed to an effective rent that is 15 percent to 20 percent below what it would have been one year ago, as well as other concessions, said Christopher White, a director of Cushman & Wakefield, the broker in the deal. “Landlords are extremely aggressive,” Mr. White said. “You can kind of name your own price within reason.”
An Equity Office spokeswoman said the company knew that last year’s rents “were not sustainable in light of the weakening economy.” The deal with DocuCorp “was consistent with the current market,” she said.
Copyright © 2002 Dow Jones & Company, Inc.
All Rights Reserved.
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Moin Xerxes!
Hab mal bei der ersten Organisation auf der HP gestöbert; nicht nur die Vermietungen, sondern natürlich auch die Verkaufszahlen haben sich nach unten orientiert.
<font size="4">Office Sales Plunged 47% in First Quarter; Brief Article; Statistical Data Included</font>
Real Estate Alert...04/03/2002
The market for large office properties got off to a bad start this year, as sales volume plummeted by 47% in the first quarter, according to a survey by Real Estate Alert.
Some $ 3.7 billion of properties traded from January to March, down from $ 7 billion a year earlier, according to preliminary data from the survey, which tracks sales of $ 20 million and more. The number of transactions plunged to 66 from 115.
The slowdown is expected to carry at least into the second quarter and perhaps over the rest of the year. Some $ 4 billion of office properties are now under contract. But given the amount of lead time needed to close deals, as well as the fact that some sales agreements end up collapsing, the market is likely to fall well short of matching the $ 8.9 billion of volume logged in last year's second quarter. Indeed, some brokers who follow the national scene predict that sales this year will fall to roughly $ 20 billion, or 35% below last year's total of $ 31 billion.
The nation's office markets face multiple problems. Vacancy rates have risen dramatically in a number of areas - reflecting corporate downsizing, especially in the high-tech sector. Rents have flattened in many markets and dropped modestly in others. And while prices have stabilized in some markets, such as Dallas, the bottom has not yet been reached in others, like Northern California.
With vacancy rates on the rise, investors have become increasingly interested in safer investments, such as single-tenant properties carrying long-term leases, and sale-leaseback transactions, under which the seller of a property agrees to a lease - usually for a long term at an attractive rate.
In several markets, it's become clear that buyers are not interested in properties above certain per-foot prices. In Northern New Jersey, no deals have been struck above $ 200/sf; whereas in 2001 a handful of buildings sold for more than $ 230/sf. In Houston, meanwhile, properties seldom sell for more than $ 130/sf.
The Los Angeles area was the most-active market in the first quarter, with six deals totaling $ 651.1 million, including Maguire Partners' purchase of a 75% stake in Library Tower for $ 300 million. Chicago and its suburbs came next, at $ 475 million, followed by Washington ($ 460.2 million), South Florida ($ 272.2 million) and the Dallas area ($ 260.5 million).
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