NEW YORK - The U.S. office vacancy rate reached a five-year high in the third quarter, pushed up by extra unused space that just about wiped out all the gains made during the commercial real estate boom, according to real estate research firm Reis Inc.
The national vacancy rate rose 0.6 percentage point to 16.5 percent from the prior quarter and is up 2.3 percentage points from a year earlier, according to a report Reis released on Wednesday.
The last time we saw vacancies in the mid-16s was at the end of 2004, Victor Calanog, Reis director of research said.
At the heart of the decline is the unwillingness of tenants to rent, leading to a stark uptick in the extra space that has piled onto the market.
Year-to-date the extra space, called negative absorption, totaled 64.2 million square feet.
Even worse, since the first quarter of 2008 about 106.5 square feet of extra space have piled up, nearly wiping out the 107.9 million square feet that was snatched up during 2006 and 2007.
So in seven quarters, the current recession has almost undone all additions to occupied space that occurred during the years when office rents peaked, Calanog said.
The office vacancy rate increased in 72 of the 79 primary metropolitan areas -- up from 66 out of 79 in the second quarter.
Rent declines were equally sobering he said. Asking rent slipped 1 percent from the prior quarter to $28.15 per square foot. That was down 4.3 percent from a year ago, the largest year-over-year decline since 2002.
Factoring months of free rent and other perks, effective rent fell 2.2 percent from the second quarter to $22.91 per square foot and a whopping 8.5 percent from the third quarter of 2008.
We have to look back to 1995 to observe a similar time period when office property landlords were under such pressure to retain existing tenants or attract new ones, Calanog said.
The yawning gap between asking and effective rent is likely to feed further declines, Calanog said.
At some point they will need to lower asking rents significantly in order to bring prospective tenants in the door, even before talks about concessions are initiated, Calanog said. We have yet to observe clear, systematic evidence that the office market is bottoming out and has begun to recover.
As far as individual markets, New York -- the largest U.S. office market, saw its vacancy rate rise 0.6 percentage point to 11.4 percent. Effective rent fell to $47.16 per square foot, down 4.4 percent. It was the largest quarterly drop Reis recorded since it began tracking the figures in 1999.
Even worse, year-over-year the effective rent in the New York area fell 18.5 percent, just about twice the decline New York saw in 2002 and surpassed only by the 20-plus percent dive in 1983.
Effective rents fell in 68 out of 79 markets in the third quarter. Markets such as San Diego, Seattle, Boston, San Jose, Orange County and San Francisco, all registered double-digit year-over-year effective rent declines.
(Reporting by Ilaina Jonas; Editing Bernard Orr)