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Office rents will be flat to edging lower through 2009. That follows a sharp increase of 10% in 2007, which flattened out throughout this year. The outlook for next year is poor but will worsen if job losses become more severe than anticipated.
Rents are following a typical business cycle pattern. The economy weakens, then job growth stalls, then the vacancy rate for offices rises and finally rents take a hit. We're just beginning to see fourth stage.
Tenants will find that landlords are boosting incentives, giving more cash to make improvements, and in some cases offering a couple months free rent. Jon Southard, an economist with Torto Wheaton Research, says, "Tenants will find more choices a year from now. If your lease is coming due, keep it short."
A key issue affecting rents is economic health, especially in employment. If companies are laying off workers because demand is weak, there’s also less demand for office space. Job losses in this downturn aren't as severe as in past recessions, but they are piling up. While we expect losses to level off in 2009, the economy will remain weak, which translates into a rising vacancy rate in 2009 of about 17% on average compared to a 14% average this year.
To make matters worse, as demand weakens, the market is oversupplied with office buildings, the result of exuberance in 2006 and 2007. Buildings take at least two years to go from the drawing board to the market, so projects started last year are still in the pipeline. Robert Bach, senior vice president with Grubb & Elllis says, "People say they didn't overbuild. But there's 100 million square feet still in the pipeline."
Cities faring the worst will be those that were caught up in the housing boom and overexpanded mortgage-related services, which have now collapsed. This includes: Orange County, Calif., as well as Phoenix, Las Vegas, Miami and Orlando, Fla., -- all will see rents decline between 2% to 5%.
Cities that avoided the housing boom will see rents rise about 5% in 2009. These include Dallas, Houston, Indianapolis and Pittsburgh. Holding steady will be Washington D.C. and Seattle.
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