Office market sees rent growth evaporating

By Ilaina Jonas

NEW YORK (Reuters) - U.S. office rent growth stalled in the second quarter and vacancies crept up, a trend that could portend rising loan defaults in the commercial real estate market, according to a report by real estate research firm Reis.

U.S. office rents grew just 0.7 percent in the second quarter when factoring in concessions, less than half the 1.5 percent posted in the first quarter and far slower than 3.2 percent a year earlier.

"In inflation-adjusted terms, both asking and effective rent growth have stalled," Reis chief economist Sam Chandan said.

The U.S. office vacancy rate ticked up 0.2 percentage points for the second consecutive quarter to 13 percent, its highest in more than a year.

"The vacancy rate isn't skyrocketing, but there's enough nervousness (by tenants) that there's some hesitation to make a longer term commitment, which is why you see that -- in spite of the vacancy rate being very low and despite the increase in the vacancy rate being quite modest -- the gains in rents have evaporated," Chandan said.

At an annualized rate, rents are growing just 2.9 percent, a fraction of the 10.6 percent seen last year.

Although the weakening rental rates and rising vacancies are modest compared with the downturn after the dot.com bust, they could lead to the failure of many investments made in the past one or two years.

"On the investment side, this is extremely problematic because of the extent to which these properties have been leveraged and the much higher underwriting standards that will have to be met in the future," Chandan said.