U.S.Office Market Shows Further Signs of Weakening as Economy Contracts

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U.S.Office Market Shows Further Signs of Weakening as Economy Contracts

Fourth Quarter 2008

Colliers

For the fourth consecutive quarter, the U.S. office market gave back space during the fourth
quarter, helping to push the national vacancy rate up for the fifth consecutive three-month
period. A modest supply of office development also came on during the fourth quarter, again
helping to put upward pressure on the national vacancy rate. Rents accelerated downward
as weakness in the general economy became more apparent with downtown lease rates in
particular falling sharply. Looking forward, office space fundamentals are sure to weaken
substantially as tenants pull back and construction continues, at least through the end of 2009.
Almost every region of the country is reporting weak economic growth with job losses now
anticipated for the balance of 2009.Weakness that was largely restricted to financial services and
housing has now spread to the economy at large with very few industries considering expansion or
new hiring. With such an uncertain business environment, the office space market will remain
extremely weak through the end of 2009.
U.S. office vacancy rate posts fifth consecutive increase. – The US national office vacancy rate
moved substantially higher during the fourth quarter, marking the fifth consecutive increase.
Aided by a 12.4% jump in sublease space, the overall vacancy rate increased 52 basis points to
register 14.18%. Vacancies are now back to Q3 2005 levels. The Downtown vacancy rate
increased 64 basis points to register 12.08%, while suburban vacancies increased 46 basis points to
total 15.17%. Class A vacancy rates also moved higher with prime CBD vacancies rising 88 basis
points to 11.06%, while suburban vacancies increased 63 basis points to 15.30%.
Tenants returning space to the market produces negative absorption. – Fourth quarter
absorption was again negative with occupied space contracting by 11.4 million square feet (MSF),
the fourth consecutive quarterly contraction and in stark contrast to a year ago when absorption
was 9.8 MSF. Full year absorption registered -15.7 MSF. The last time absorption posted
negative absorption was 2002, when occupied space contracted by 40.1 MSF. Canadian markets
managed 1.0 MSF of positive absorption, marginally below the third quarter when absorption
registered 2.6 MSF.

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