U.S. Office Vacancies Reach Five-Year High of 16.5%, Reis Says

Oct. 7 (Bloomberg) -- U.S. office vacancies rose to a five- year high in the third quarter, as job losses deepened and employers abandoned space in the recession, property research firm Reis Inc. said.

Vacancies climbed to 16.5 percent from 13.7 percent in the year since Lehman Brothers Holdings Inc. filed for bankruptcy, New York-based Reis said in a report. Effective rents, the amount actually paid by tenants, fell 8.5 percent, the biggest year-over-year drop since 1995.

“The decline in effective rents really accelerated after the fall of Lehman Brothers,” Victor Calanog, director of research at Reis, said in a statement. “Tenants will continue shedding occupied space as jobs are lost.”

U.S. job losses accelerated in September and the unemployment rate climbed to 9.8 percent, the highest level since 1983. Payrolls dropped by 263,000, bringing total jobs lost since the recession began to 7.2 million, the biggest decline since the Great Depression. The BBREIT Office Property Index of 14 stocks lost 14.31 percent in the 12 months through yesterday.

Financial firms cut more than 180,000 jobs in the Americas in the credit crisis that brought down or forced the sales of Bear Stearns Cos., Washington Mutual Inc., Merrill Lynch & Co. and Lehman Brothers.

The three months ended Sept. 30 marked the seventh straight quarter in which landlords reported a net loss in the amount of space occupied by tenants. About 19.6 million more square feet were vacant than in the previous quarter, Reis said.

Second-Worst Year

The U.S. is on pace for its second-worst year in terms of net office absorption since at least 1980, the beginning of Reis’s records, Calanog said.

The national vacancy rate was 15.9 percent in the second quarter.

New York vacancies jumped to 11.4 percent in the third quarter from 6.6 percent a year earlier, and the city’s effective rents tumbled 18.5 percent, Reis said.

The drop in rents is about twice the decline New York experienced in 2002, following the Sept. 11, 2001, terrorist attacks. Rents fell 9.3 percent that year, Calanog said.

The collapse of Seattle-based Washington Mutual helped drive that city’s office vacancy rate to 14 percent in the third quarter from 10 percent a year earlier. Effective rents fell almost 11 percent, Reis said.

WaMu collapsed in September of 2008 as federal regulators seized its banking unit and sold its assets to JPMorgan Chase & Co.

San Francisco, San Diego, Boston, San Jose and Southern California’s Orange County all reported declines in effective rents of at least 10 percent from a year earlier, Reis said.

“Weakness in rents is not concentrated in just a few” cities, Calanog said. “We have yet to observe clear, systematic evidence that the office market is bottoming out.”