October 3, 2008 / 8:39 AM / 11 years ago

Office vacancy rate reaches 2-year high: report

NEW YORK (Reuters) - The U.S. office vacancy rate rose to its highest level in two years during the third quarter, as the rapidly shrinking financial industry and weakening economy took a toll on leasing.

Job losses, expiring leases that are not being renewed and a sharp increase in space available to sublet, pressured rental and occupancy rates in the U.S. office sector, according to a reported released on Friday by real estate research firm Reis Inc.

“This trend will continue in the coming quarters as large financial services firms, among others, rationalize payrolls and consolidate employees as part of the current wave of mergers and acquisitions,” Reis Chief Economist Sam Chandan said in a statement.

U.S. office vacancy rose to 13.6 percent, up 0.5 percentage points from the second quarter, its largest one-quarter jump since the second quarter of 2002. The third-quarter vacancy rate was the highest since the second quarter of 2006 and was 110 percentage points higher than its recent low of 12.5 percent set in the third quarter of 2007.

About 23.7 million square feet of office space was available in the third quarter than was leased. About 18.2 million square feet of that was added in just the third quarter, Reis said. That is more than five times the 3.59 million square feet added in the second quarter.

Eleven and a half million square feet of new construction were added to the market in the third quarter.

Asking rent growth grew 0.6 percent in the third quarter, its slowest since the second quarter of 2005. To attract tenants, landlords were forced to offer more concessions, such as free months rent. That eliminated effective rent growth, translating to an average rent of $25.16 per square foot in the third quarter of 2008. Growth failed to keep pace with inflation.

“The overwhelming uncertainty in the business and economic environment has further undercut businesses’ readiness to make new, long-term commitments,” Chandan said. “Even amongst firms that are weathering the downturn, many are waiting to sign leases to meet future space needs in anticipation of rising concessions.”

Just last week, HSBC Holdings Plc, the London- based bank, backed out a deal to lease for the top six floors at 7 World Trade Center.

The crisis in the financial sector — the acquisition of Bear Stearns, Wachovia, Merrill Lynch and the demise of Lehman Brothers — began to appear in the third quarter. Although still retaining the lowest vacancy rate in the country, New York saw office vacancy rise to 6.1 percent from 5.7 percent. Washington D.C. was second at 8.1 percent.

New York’s effective rent inched up just 0.4 percentage points to $58.71 per square foot.

The weakening fundaments prompted Bank of America on Thursday to cut its rating on Boston Properties Inc to a “neutral” from a “buy” citing the landlord’s sensitivity to the New York City office market. The real estate investment trust derives about 40 percent of its net operating income from New York properties.

Of the 79 markets that Reis tracks, 64 saw average vacancy rate increase, while only 11 saw occupancy improve. Effective rents fell in 46 of 79 markets.

At 23.9 percent, Detroit had the highest vacancy rate, with Dallas coming in second at 22.3 percent.

Washington, D.C. and Boston saw the strongest rent growth at 1.8 percent in the third quarter to an average $43.69 per square foot in Washington, D.C. and $34.48 per square foot in Boston.

Tacoma, Washington and Orange County, California saw rent fall by the widest rate, at 2 percent, to $17.36 per square foot in Tacoma and $25.48 in Orange County.

Editing by Andre Grenon

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