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Grubs & Ellis research points to deteriorating office market.

Grubb & Ellis Company recently released research that indicates the national commercial office market deteriorated during the first quarter of 2001. This was best illustrated by the vacancy rate, which increased from 8.86% in the fourth quarter of 2000 to 10.34% in the first quarter of 2001. Net absorption, another key indicator, registered a negative 7.4 million SF. This is the steepest quarterly decline in occupied space since Grubb & Ellis began tracking the market in 1986.

"Although the national vacancy rate increased to double digits for the first time in over a year, it's important to keep everything in perspective," explained Robert Bach, national director of market analysis. "The market has merely moved from conditions too tight to be sustained and where tenants had few options to a more balanced environment. On a historical basis, the national vacancy rate is still healthy. However, it is likely to drift higher through the middle of 2002, accompanied by a moderate softening in rents. This is due to the delivery of new supply that is currently in the construction pipeline. Even with about one-third of it already pre-leased, it is expected to outpace demand by an average of 7 million SF per quarter during this period."

Bach predicts that by mid-2002, this imbalance would push the vacancy rate from the current 10.34% into the range of 11.5 to 12%, slightly overbuilt by historical standards and a level not seen since late 1996 and early 1997.

"During the past quarter rising vacancies were driven by two primary factors. New office product -- with its long lead times and construction cycle -- continues to be delivered to the market. In addition, higher layoffs and corporate downsizing have reduced office space needs. As a result, vacancy rates got hit from both the supply and demand side, resulting in the sharp rise in vacancies," he added.

The Grubb & Ellis research also revealed other interesting findings:

* New construction -- both speculative and built-to-suit -- declined slightly. Construction peaked in the third quarter of 2000 at approximately 125 million SF. During the first quarter 2001, this declined to approximately 114 million SF of office space under construction.

* Approximately 70% of the vacancy increase was attributed to new construction that was not leased when delivered to the market. The remaining. 30% was due to tenants vacating existing space.

* Net absorption was negative 7.4 million SF for the first quarter. Class "A" net absorption was nominally positive, with all of the negative absorption concentrated in class "B" and "C" properties.

* Although asking rents pulled back slightly during the first quarter, they are higher on a year-over-year basis. Compared to the prior quarter, class "A" asking rents fell by approximately 1.1%. Compared to the first quarter of 2000, class "A" rents are up by 9.6%. However, it is important to note that tenant improvement allowances and other concessions have resulted in a moderate decline in effective rents. This is particularly evident in those markets -- San Francisco and Boston, for example, that experienced rent spikes driven by last year's unusually strong demand from technology companies.

* Sublease space increased significantly from 45.7 million SF in the fourth quarter to 61.4 million SF in the first quarter.

The stunning 34% increase in sublease space was due to several reasons, including the demise of the dot-coms, layoffs at a broad range of companies coping with declining earnings, and the fact that tenants had been taking more space than they needed in anticipation of future growth or in fear of being shut out of last year's tight leasing market.
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Title Annotation:commercial real estate
Publication:Real Estate Weekly
Article Type:Brief Article
Geographic Code:1USA
Date:May 30, 2001
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