As I have written in the past, commercial real estate has been hit hard during this recession and the worst is probably yet to come. Just speak with any commercial real estate agent and they will tell you that vacancy is on the rise and good deals are to be had. As more organizations are reducing employees, downsizing operations… office space is becoming easier to find.
The Wall Street Journal recently had a great article titled, Office Rents Dive as Vacancies Rise. The article points out the obvious, that as vacancy rates increase, the rents are decreasing. Nationwide, office rents fell 8.5% in the third quarter of this year, while vacancy rates have hit 16.5%.
Below is an excellent chart showing the increase in vacancy rates as compared to prior years and compared to the unemployment rate.
What I find interesting about this chart is that we are seeing a much higher unemployment rate (10% vs 6%) now than compared to the last recession of the early 2000s and yet we have a similar vacancy rate (16%). It would appear that vacancy rates trail the unemployment rate. Therefore, this leads me to believe that vacancy rates have not hit their peak. How much higher can they go? I would not want to speculate, but clearly higher.
If you are in the market to rent office space or looking to renew a lease, you should have some incredible leverage to negotiate attractive rates. Likewise, as balloon payments on the mortgages for these office buildings come due in the next few years, there will be some amazing deals available.
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One note from an insurance perspective is that vacancy affects the payment of claims. If you are a building owner/landlord - check with your agent as oftentimes after 60 days claims involving any type of theft or glass breakage will be denied and other perils will reduce in payment by 25-50%. (depends on your policy).
Posted by: John Olkowski | October 09, 2009 at 09:34 AM
That is a very interesting observation. I really think that if there is anything that can save us in this recession is the real estate market. Coming back to the point it is surprising to see that the graph shows unemployemnt up to 10%. I really hope not. If so, the commercial market and the rest are in some real big trouble.
Posted by: CPA Continuing Education Online | October 14, 2009 at 05:24 AM