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NEW YORK, April 2 (Reuters) - U.S. office rents posted their steepest decline in seven years in the first quarter as layoffs, weak credit markets and economic uncertainty drained demand, according to a report by real estate research firm Reis Inc.
The New York area, the U.S. financial center, saw rapid deterioration, with rents declining at the steepest rate since Reis began compiling quarterly data in 1999.
"You really only fell off the cliff in the fourth quarter 2008," Victor Calanog, Reis director of research, said. "It's really sobering to see that even though we're technically at the beginning of this downturn, the magnitudes of the declines, the fact that they're registering historic levels, is really sobering."
The declines in rent and occupancy along with frozen credit markets could accelerate delinquency rates for U.S. office buildings, Reis said. Not only will borrowers find it difficult to refinance maturing loans, declining fundamentals will erode property values.
Overall commercial property values have declined 22 percent from their peak in 2007, according to J.P. Morgan.
Effective rent, which includes months of free rent and other compensation to tenants, for the overall U.S. market fell 2 percent from the prior quarter to $24.15 per square foot, the lowest level since the third quarter of 2007. Effective rent was off 3.2 percent year over year.
Asking rent fell 1.1 percent in the quarter and was down 0.3 percent for the year.
Meanwhile, the U.S. vacancy rate in the first quarter rose to 15.2 percent from 14.5 percent in the prior quarter. It was the highest vacancy rate since the second quarter of 2005.
The office vacancy rate rose in 63 of 79 primary metropolitan areas and effective rents fell in 64 of 79 markets, indicating a continued rise in concessions from the fourth quarter of 2008 to the first quarter of 2009.
New York, the epicenter of the financial crisis, was hit hard during the first quarter, with effective rent dropping 5.2 percent from the prior quarter to $52.83 per square foot. Vacancies spiked to 10.2 percent from 8 percent. Year-over-year effective rent fell 9 percent
Demand in space from companies weakened, resulting in a U.S. surplus of 24.9 million square feet of space available to rent in the quarter.
Last quarter, Reis projected surplus space would reach 47.7 million square feet by the end of 2009. But with economists generally expecting an economic recovery in early 2010, it is likely that the amount of surplus space will be higher, and possibly record-setting.
"The duration and magnitude of the current recession throws further uncertainty into the mix, as tenants are not only downsizing in terms of the space they occupy, news is replete with firms going out of business altogether," Reis said.
The San Francisco area, hard hit by the 2000 dot-com bust, led the last downturn, Reis' Calanog said, and rents never recovered. (Reporting by Ilaina Jonas; editing by Jeffrey Benkoe)