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Salomon: slow building no impetus for demand.

Despite an abrupt collapse in construction that should herald the greatest improvement in the supply and demand equation in the last decade, a report by Salomon Brother's real estate research unit says that the market for office space in the United States can expect only a very modest recovery over the next 24 months, with virtually all the gains posted in the suburbs.

The publication, "Toughing It Out In The 1990's," forecasts that vacancy rates in suburban areas will drop 2.8 points to 18 percent during the next two years, while the vacancy rate in the nation's central business districts remains steady at 18.4 percent. Should the prediction prove accurate, Salomon Brothers says, it will mark the first time in six years that suburban office markets will be in better supply-demand balance than downtowns.

"The condition we anticipate for the suburbs is completely consistent with our findings that it is the dearth of construction, rather than increased demand, that will fuel this modest upswing," said Sandon J. Goldberg, the Salomon Brothers real estate research analyst who wrote the study. "The most extreme recent decreases in construction occurred outside the cities."

The report stated that current construction in the pipeline in 55 key markets has dropped to 34 million square feet. Suburban building took the hardest hit in the last six months, falling by more than half. Indeed, the study found that construction activity in the suburbs has dropped 95 percent since 1986.

But the dramatic supply-side declines were nearly matched by the extreme weakness in demand that the study uncovered. The latest 12-month absorption rate of 32 million square feet is at a decade-low level, and Salomon Brothers estimates that the office market faces a statistical 12-year supply of space, unchanged from six months ago. The news is worst in central business districts where absorption rates continue to lag those of suburban markets by a factor of three, continuing a five-year trend. Salomon Brothers predicts absorption will remain sluggish over the next 24 months, averaging just 36 million square feet annually.

"Every indication is that the recovery in the real estate markets will continue to be painful, slow and sporadic," said Goldberg. "These low levels of activity augur little change in the office market picture over the next two years, as the market traces out an extended bottom in a state of structural oversupply."
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Title Annotation:Salomon Brothers Inc. predicts slow recovery in the real estate market for office space in the United States through June 1994
Publication:Real Estate Weekly
Date:Jun 10, 1992
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