The vacancy rate for office space has recently soared to 17.2%, this is the highest in sixteen years. This rise in vacancy, attributed to the weak jobs market, is now being complemented by a decrease in rents. This means less income for property owners and lower commercial property values
Every day, the powers above provide new news in support of economic recovery, but can we simply believe what they say, when faced with the facts. Office vacancies are on the increase and property rents are decreasing, if economic activity is picking up then perhaps the contradictory “jobless recovery” theory is correct, or perhaps we are all living in the Twilight Zone.
“The U.S. office vacancy rate rose to 17.2 percent, a level unseen since 1994, as the market lost about 11.6 million net square feet of occupied space during the first quarter, according to the report released on Monday. The U.S. vacancy rate inched up 0.2 percentage points from a quarter earlier and was 2 percent higher than a year ago.”
"As labor markets stabilize, we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given typical lags in commercial real estate," Reis director of research Victor Calanog said in a statement. "Even as occupancy continues to deteriorate, we're observing signs of renewed leasing activity across different metros."
According to reports, office vacancy reached a new low of 12.5 percent in the third quarter of 2007.
According to those powers this 38% increase since the beginning of the recession is proof that we are on the path of economic recovery. This seems to be the same as saying, “The situation is so bad right now, at least they it can’t get any worse.” This “things can only get better” attitude is the exact one adopted by many, whilst we were on a disastrous spiral towards the economic black-hole.
Banks face losses as rents fall
“Rental rates fell an average of 0.8 percent in the first quarter, a less steep decline that seen last year. Asking rent fell 4.2 percent from a year earlier. Factoring months of free rent and landlord contributions to space improvements for each tenant, effective rent was down 7.4 percent from a year earlier.
Both asking and effective rent were off 0.8 percent from the fourth quarter 2009. The fact that effective rent is no longer falling at a greater rate than asking rent is an indication that landlords may have offered enough concessions to stimulate leasing activity.”
A decrease in rent is synonymous with a decrease in property value. Commercial office space rental has always been valued based on its income, with operating income naturally decreasing with rising vacancies, it is hard to see how commercial property can escape its downwards tumble. Not even swiftly decreasing rents can stop the huge upsurge in office vacancies, a tell tale sign that businesses are suffering.
You think the 140 Bank failures of 2009 were bad, just wait for 2010. Banks are being blamed for losses due to an increase in vacancies in commercial buildings. Whilst Banks continue to go on the defensive over extending credit as losses pile up on loans given out at the peak of the housing boom, economic activity stops the real world in its tracks. Small businesses are being denied the very credit they need to survive in today’s financially unsure world.