US Office Vacancies at Three Year High - Bellevue well below national average, According to Cushman

U.S. Office Vacancies Rise to Three-Year High, Cushman Says

By Hui-yong Yu

April 16 (Bloomberg) -- Office vacancies in U.S. downtowns increased to 12.5 percent in the first quarter, the highest in three years, as companies cut jobs and new buildings came onto the market, Cushman & Wakefield said.

The national office vacancy rate climbed from 11.2 percent in the fourth quarter and 9.9 percent a year earlier, the New York-based property broker said today in a statement. The amount of newly leased space fell 39 percent from a year earlier to 10.6 million square feet (985,000 square meters), Cushman said.

U.S. employers fired more than 650,000 workers during each of the past four months, pushing the unemployment rate to 8.5 percent in March, the highest since 1983, according to the Labor Department. The first-quarter vacancy rate was the highest since the first three months of 2006, when it was 12.6 percent.

“This will be a very difficult year for commercial real estate and for office markets in particular,” said Maria Sicola, executive managing director and head of Americas Research for Cushman & Wakefield, in a telephone interview.

Downtown office vacancies nationwide could come close to 15 percent by the end of this year, approaching the 10-year high of 15.5 percent in 2003, Sicola said. Of the 31 U.S. cities tracked by Cushman, about half already have vacancies of 15 percent or more, company spokesman Dwayne Doherty said.

Manhattan Market

The Midtown South and Downtown sections of Manhattan, the New York City borough that’s biggest office market in the U.S., had the lowest vacancy rates in the first quarter, at 8.1 percent each, according to Cushman. New York overall was third- lowest at 9.6 percent.

Manhattan office-vacancy rates could climb to 12 percent by the end of 2008 as Wall Street companies reduce payrolls, Sicola said. Seattle, the former headquarters of failed thrift Washington Mutual Inc., could see office vacancies approach a record 17 percent, from 12.6 percent in the first quarter, because of job losses and new construction, she said.

“This is evidence of the fact that real estate lags the general economy overall and how these markets were positioned going into this downturn,” Sicola said.

All but one of the 31 central business districts tracked by Cushman had higher vacancy rates last quarter, the firm said. The exception was Dallas, where vacancies fell to 27.2 percent from 27.6 percent at the end of 2008 due partly to two big leases. Dallas still had the highest downtown office vacancy rate in the U.S.

Lower Rents

Downtown office landlords cut their asking rents by an average of 2.2 percent in the first quarter, to $39.50 per square foot from $40.37 at the end of 2008, Cushman said. Asking rents were higher than the $37.69 average of a year earlier and rents rose in 14 of 31 cities tracked by the firm. The largest increase was $1.20 per foot in Baltimore, while the biggest decline was $6.63 a foot in San Francisco.

Landlords have been cushioned from the high vacancy rates by long-term lease agreements, Sicola said. So while the amount of space for sublease rose 24.5 percent from the previous quarter, the space available directly from landlords grew by less.

“Sublease has a very dramatic effect on what happens in the overall market,” Sicola said. “We are just entering into what will be a very strong market for the tenant. We can see rents come down 10 or 15 percent or even 20 percent before this is over.”

Other cities with vacancy rates below the national average were Portland, Oregon, and Philadelphia at 10.2 percent each, Boston at 10.6 percent, Baltimore at 12 percent, and Bellevue, Washington, at 12.1 percent, Cushman said.

New construction also contributed to the vacancy increase in the first quarter, Cushman said. About 3.3 million square feet was completed in the first quarter and about one-third of that space was still empty at the end of March.

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net.

Last Updated: April 16, 2009 09:04 EDT