CommCap Advisors

The overall office vacancy rate has increased over the past year due to net negative absorption and an unneeded supply increase. Fortunately, very few projects will be added to the existing stock in the near future. According to the Colliers International Market Report for the Fourth Quarter 2009, the overall office vacancy rate was 22.5%, which is 3.7% higher than the 4th quarter of 08*. There is a glimmer of good news, however. The increase to the vacancy rate is slowing so we feel the market should stabilize later this year. The report indicated that the majority of the vacancies are in newer (within 3 years old) properties located in projected high growth areas. The only property type that posted a positive net absorption for the year was Class C, with most of that in the fourth quarter. This is an indicator of significant movement by tenants to smaller, cheaper space. Medical office continues to be the best leased office product type with a better than market vacancy rate of 19.5%. The Class A market shows the highest vacancy rate, currently in excess of 30%. This statistic is somewhat distorted by a number of large new buildings that were built in outlying locations which were to take advantage of executive residential growth that has not occurred. Well located, high quality buildings that price aggressively to retain tenants are still performing reasonably well.

The report also tracks asking rental rates by product type and submarket. Across the board, rental rates have fallen but how much is hard to determine. According to the report, average asking rental rates are down $0.05-0.07 per square foot per month compared to the fourth quarter of 2008. Unfortunately, the report tends to overstate current average rents. It has become common practice for landlords to provide a teaser rate for the early months then increase the rent substantially over the term of the lease. For example, if a tenant were to execute a five year lease their rate would likely start at $1.50/sf/mo. and increase $0.25 every six months until a stabilized rate of $2.50/sf/mo. is reached. Once a more stabilized rental rate is reached, the lease increases would normalize. When the broker reports the rate, he\she would report the average rate based upon the life of the lease, which would be significantly higher than the starting rate of $1.50/sf/mo. Because of the reluctance to share information by landlords and brokers, an accurate current market rate is impossible to determine. As the market stabilized over the next 12 months, accurate market rents will be easier to obtain. Most brokers and owners agree that we are near or at the bottom of the office market and rents should stabilize within the near term.