by Calculated Risk on 1/09/2009 12:17:00 AM

First, a few articles:

From the Seattle Times: Downtown office markets may soon see vacancy rates in the teens

Vacancy rates in the two downtowns will climb well into the teens this year as companies downsize and new office buildings — some still lacking even a single signed tenant — come on line, according to new reports from brokerages Cushman & Wakefield and Grubb & Ellis.

From the IndyStar.com: Indy office vacancy rate is highest since '04

The office vacancy rate in the Indianapolis area hit 19.5 percent at year end, a fraction of a percent higher than in the third quarter.

The vacancy rate is the highest since at least 2004, says CB Richard Ellis commercial realty in its year-end report.

Six multi-tenant office buildings opened in the metro area last year, which helped boost the overall vacancy rate.

From the Austin Business Journal: Austin office vacancy hits 19%

Austin’s overall office vacancy rose to 19 percent in 2008, compared with a 14 percent overall vacancy rate in 2007, according to a report released today by Oxford Commercial. ...

An increase in inventory--Austin now has a total of more than 42 million square feet of office space as of the end of 2008, 3.6 million of that delivered in the past 12 months--contributed to the increase in vacancy rates, said Vic Russo, a senior vice president in the Austin brokerage firm’s office division.

Supply is increasing as more office space is being delivered, more companies are subleasing space, and companies are downsizing. Demand is falling (actually negative) as the economy weakens. The following graph is from CoStar Commercial Real Esate The State of the Commercial Real Estate Industry: 2008 Review/2009 Outlook (no link)


Click on graph for larger image in new window.

For the next two years, CoStar is projecting about 110 million square feet of new office space will be delivered per year (over 150 million in 2009!), and they are also projecting negative absorption of about 230 million square feet per year.

This suggests rents will fall sharply for the next couple of years, delinquencies will rise, and new office construction will come to a halt. Although deliveries will be strong in 2009 (with all the projects currently under construction), CoStar projects new office deliveries in 2010 will the lowest since 1996, and deliveries in 2011 will be the lowest in over 50 years.

Definition of Negative Absorption: The absorption rate is the net amount of square feet leased each year. A negative absorption rate means that more companies are downsizing or subleasing space than companies expanding and adding space.

"Negative absorption" are two words no developer ever wants to hear.