January 8, 2010 / 5:06 AM / in 9 years

At 17 pct, US office vacancy rate hits 15-year high

 * U.S. office vacancy rate hits 17 percent
 * Rent falls 8.9 percent for the year
 By Ilaina Jonas
 NEW YORK, Jan 8 (Reuters) - The U.S. office vacancy rate hit a 15-year high in the fourth quarter and landlords slashed rent last year by the largest amount since at least 1980, real estate research firm Reis Inc said on Friday.
 "This period marks the eighth consecutive quarter since the beginning of 2008 that office properties registered deterioration in occupied space," Victor Calanog, Reis director of research, said in a statement. "We should not understate the amount of pressure that office properties endured since the recession began."
 During the fourth quarter the national office vacancy rate climbed 0.40 percentage point from the third quarter to 17 percent, the highest level since 1994.
 For a graphic on the fourth quarter's results, click link.reuters.com/syz32h
 Since the start of the recession in December 2007, the U.S. economy has shed 7.2 million jobs, drastically reducing demand for office space and flooding the market with sublease space. To lure or retain tenants, landlords have offered months of free rent and have kicked in for the cost of converting a raw space onto offices.
 "Despite declining job losses, we have yet to observe clear, systematic evidence that the office market is bottoming out and has begun to recover," Calanog said. "We will need to see clear, systematic evidence of resumption in hiring before businesses begin leasing new space."
 During the fourth quarter, asking rent fell 1.1 percent to $27.80 per square foot. But factoring free rent and other concessions, the net amount landlords received, known as effective rent, dropped 1.9 percent to $22.44 per square foot. For the year, effective rent fell 8.9 percent, the largest one-year decline since Reis began tracking it in 1980.
 "Never before have landlords been under so much pressure to offer concessions to attract and retain tenants," Calanog said. "Asking rents have fallen at a lower rate, but this just implies further room to fall down the road if conditions do not improve soon. Landlords can only offer so much concessions, and at some point they will need to lower asking rents significantly in order to bring prospective tenants in the door."
 The office vacancy rate rose in 63 of the 79 primary metropolitan areas that Reis covers. Effective rents fell in 70 of them.
 That could make things tougher for landlords such as Boston Properties Inc (BXP.N), Vornado Realty Trust (VNO.N), Maguire Properties IncMPG.N and Kilroy Realty (KRC.N).
 In the New York area, by far the largest U.S. office market, vacancy rose only 0.10 percentage point in the fourth quarter to 11.5 per square foot. But that came at a cost to landlords, who offered more concessions, driving effective rent down 5.3 percent for the quarter to $44.69 per square foot.
 For the year, New York rents fell 19.8 percent, the largest 12-month decline since Reis began tracking them in 1981, wiping out gains from the peak year of rent growth in 2007 when rents rose 25 percent.
  The California market of San Bernadino/Riverside, which is among the hardest-hit areas of the U.S. housing bust, had the highest office vacancy rate at 26.1 percent, up 2.4 percentage points from the prior quarter.  (Reporting by Ilaina Jonas, editing by Matthew Lewis)   

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