US office markets stabilize as new sublease space slows

The onslaught of sublease space which has been put on the national office market over the last two years slowed in the third and fourth quarters of 2002, according to the global real estate services firm Cushman & Wakefield.

The amount of sublease space coming on has decreased slightly in each of the last two quarters, reversing a trend that began in the fourth quarter of 2000. However, 123 million square feet (msf) of sublease space is on the market, representing 25 percent of the total national availabilities (519 msf).

Cushman & Wakefield President of U.S. Operations Bruce Mosler said sublease space will begin to be leased up when an economic recovery takes hold in the middle of 2003.

'As profitability and cash flow continue to improve, companies will be better positioned to re-invest in human resources,' Mr. Mosler said. 'When the employment picture turns around, most likely in the second half of 2003, the resulting job creation will be an additional catalyst to the real estate market.' Downtown Markets The national downtown vacancy rate rose slightly to 14.8 percent at the end of 2002, from 14.4 percent at the end of the third quarter of 2002, according to Cushman & Wakefield.

Maria T. Sicola, senior managing director, Research, Cushman & Wakefield, said several downtown markets around the country 'remain in equilibrium' despite the nearly two year increase in sublease space. She pointed to Washington, D.C., with an overall vacancy rate of 7.9 percent, and Midtown Manhattan, at 11.1 percent, as prime examples. 'Washington, D.C. has been helped by government related activity and Midtown Manhattan by its traditional strength as a diversified business center,' Ms. Sicola said.

While rents continued their descent over the course of the year, it appears the largest declines have already taken place. Tenants have been in a strong position to negotiate new transactions, generous concessions and take advantage of early renewals. 'The window of opportunity will be closing in the latter half of 2003 and in early 2004 as rents stabilize in many markets,' Mr. Mosler said.

Suburban Markets
The national suburban vacancy rate rose to 20.5 percent in 2002, from 20 percent at the end of the third quarter. Suburban markets have been plagued by an oversupply that has been fueled by ongoing new construction as well as sublease space. Nearly 40 msf of new construction was added in the suburbs in 2002, and 72 msf was added in 2001. Another 23 msf is currently under construction, with 19.8 msf scheduled for delivery in 2003.

Office Investment Markets
The office investment market has remained solid despite the lukewarm leasing market, as real estate investment returns remain healthy compared to other asset classes. According to Real Capital Analytics, acquisitions of core properties across all property types are up nearly 25 percent from 2001, with nearly $32 billion in office property transactions year-to-date through November.

(source: Cushman & Wakefield)

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