The national office vacancy rate is inching toward 17% and a significant number of maturing loans are coming due in the next 18-24 months. As a result, building owners are pressing hard to retain tenants and clean up balance sheets before the next real estate aftershock.
A year ago, owners believed they could offer more generous tenant improvement allowances and free rent (rather than lower rates) and ride out the economic storm. But that didn’t happen. Instead, the U.S. office vacancy rate escalated to 15.3% in 1Q 08 up from 12.5% in 3Q 07 while rents fell by 3.6%. In 2008, many people felt, despite the fact we were headed into an unprecedented economic situation, that it would be somewhat manageable. And this feeling wasn’t without facts to support it: unemployment was at 5.6% in June 2008 and the office market was showing only modest signs of weakness (particularly downtown Portland). But by June 2009, unemployment skyrocketed to 9.5% (I don’t even want to mention the Oregon unemployment rate) and office markets across the country were experiencing large vacancy rates as tenants downsized or disappeared completely.
Unfortunately, for property owners this is only half of the problem as maturing debt and major drops in property valuations continue to increase volatility. The price per square foot for office buildings, according to Real Capital Analytics, fell 62% from November 2007 to May 2009. This means many owners are now upside down on their mortgages, just like homeowners. For now, as long as owners can service their debt payments, many lenders are granting short-term extensions. The trouble with this option is that these extensions are coinciding with a mountain of debt set to mature in 2011 and 2012 (estimated to be around $602.4 billion).
There are a few bright spots however, in the office sector. Energy markets (Houston, For Worth) are seeing positive rent growth and the growth of government has helped to keep rents stable in the nation’s capital – just not in California. Yep, that’s it for the brightspots.
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