National office market steady.

National downtown and suburban vacancy rates remained steady during the third quarter, according to the global real estate services firm Cushman & Wakefield. However, the firm does forecast a sustained recovery in the real estate market in 2004 or 2005.

The downtown (CBD) and suburban (non-CBD) vacancy rates were virtually unchanged at 15.5 percent and 21.2 percent, respectively.

"Tenant demand is improving, but remains below historical levels," said Cushman & Wakefield President, U.S. Operations Bruce Mosler. "Real estate typically lags the economic recovery. We don't foresee commercial real estate markets recovering until 2004 or 2005, although any real sustained job growth prior to that could have a significant impact."

Mosler said that "at the end of the day it comes to job growth, which we look to improve around mid-2004, perhaps 2005. Only job growth will drive the recovery in the long run."

Vacancy Rates

Washington, D.C. remains the only Downtown market with single-digit overall vacancy rate at 7.9 percent, unchanged from the last quarter. The Midtown Manhattan vacancy rate dropped during the quarter, to 11.9 percent from 12.0 percent. The overall vacancy rate in San Francisco decreased slightly, to 22.1 percent from 22.9 percent in the second quarter.

The threat of shadow space still looms in several markets (Boston, San Francisco, New York), but this fear has diminished somewhat with several companies continuing to take sublease space off the market.

The total amount of sublease space on the market continues to decline. On a national basis, sublease space represents approximately 19 percent of overall available square feet, and is now at its lowest level since 2000 (when it was at 108 million square feet).

Leasing

Leasing activity remains lukewarm, with year-to-date transactions on pace with that of last year. In fact, the level of leasing activity has been relatively consistent over the last six quarters, but remains 25 to 30 percent below the levels seen in 1998 and 1999.

"Uncertain economic conditions and the beleaguered job market are resulting in many companies adopting a wait-and-see approach to their real estate needs," said Maria. Sicola, senior managing director, Research Services, Cushman & Wakefield.

Rents

Due to sluggish market conditions, average asking rents continue to soften considerably as fierce competition for quality tenants and an abundance of available space continue to hinder landlords. Asking rents are, on average, 15 to 20 percent below those seen at the peak of the market in the fourth quarter of 2000.

"Many landlords are becoming increasingly aggressive with concession packages, resulting in higher tenant improvement allowances and lower net effective rents," said Ms. Sicola.

Construction

Construction starts and completions continue to taper off, which has helped stabilize vacancy rates, particularly in CBD markets. Year-to-date construction completions total 21.8 million square feet, nearly half the total seen at this time last year.

Pre-leasing activity ranges from 60 percent to 75 percent for new office projects. Projects under construction total 35.8 million square feet, almost split evenly between CBD and non-CBD projects. This represents a more than 25 percent decrease from under construction levels at third quarter 2002, with only 17.5 million square feet currently slated for completion in 2004.

Investment

Investor activity remains robust with year-to-date office transactions of more than $24 billion, an increase of eight percent over last year, according to Real Capital Analytics.

"The influx of capital from the stock market combined with low interest rates have been the principal drivers of real estate investment activity," said Mr. Mosler.

Downtown Los Angeles remains a hot spot, with several class A buildings changing hands this quarter, including 801 South Figueroa, which sold for $240 per square foot, the highest per square foot price ever recorded in Downtown Los Angeles.

Midtown Manhattan saw the sale of 767 Fifth Avenue for $1.4 billion (approximately $800/sf), the highest price ever recorded for an office building in Manhattan.

"Leveraged buyers are the active investors in the market, due largely to artificially low interest rates. They can't afford not to take advantage of the low cost of capital," Mr. Mosler said.