Thursday, July 3, 2008

Commercial property: The next shoe to drop

First to drop are the rents. Then it's prices. This article in today's WSJ explains it all:

Companies are taking less office space across the nation, driving down rents in most markets and causing pain for real-estate landlords. It is also making it easier for businesses to rent space.

Nationwide, rents on office properties -- including landlord concessions and discounts -- rose 0.7% in the second quarter to $25.16 a square foot, the slowest growth since the second quarter of 2005, when the office market was just emerging from a half-decade-long slump, according to Reis Inc., the New York real-estate research firm.

With inflation running roughly 1% a quarter, that rent growth is effectively wiped out. "Landlords are having to concede ground on rents and tenant improvements," says Sam Chandan, Reis's chief economist. "The balance is tipping in the favor of tenants in many markets."

Coupled with recent negative economic news, the decline in the office market is a further signal that the nation's economy is on the skids. For the second quarter in a row, businesses vacated more office space than they took nationwide, a phenomenon known as negative absorption. The national vacancy rate edged up to 13%, from 12.8% last quarter.

Even some of the strongest markets are feeling the pain. New York, which had double-digit rent increases in 2007 saw rent growth slow to 0.7% in the second quarter as financial firms slashed jobs. Big firms such as J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc. have put huge chunks of office space on the so-called sublease market, which adds to supply and depresses prices.

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