Real Deals

Office vacancy at five-year high

Signs of recovery elsewhere haven't trickled down to landlords

Staff WriterJuly 30, 2009 

Shoots of economic stability are sprouting: Stocks have been on a tear. New home sales are up nationally. The Triangle's unemployment rate ticked downward last month. And consumers are flashing a little more cash.

But you won't find that story -- yet, anyway -- in commercial real estate. The industry, a lagging indicator of the broader economy, continued to take hits in the second quarter as demand for space fell at a record pace.

The Triangle's office vacancy rate climbed to a five-year high of 19.6 percent, up from 14.6 percent a year earlier, according to data from Grubb & Ellis/Thomas Linderman Graham. The last time the rate was that high was in 2004 as the local tech industry was slowly bouncing back.

Net absorption, another key indicator, fell into negative territory for only the third time in five years, meaning more companies moved out of space than into it. The ratio shows the amount of space occupied minus the space vacated. It reversed by the widest margin of any quarter since the Raleigh brokerage started keeping data in 1990. Tenants moved out of almost 460,000 square feet during the three months that ended June 30. That's more than twice the previous record, set during the tech bust.

"And we're in the relatively early stages of the cycle," says Elizabeth Raiford, vice president of marketing and research at Grubb & Ellis/Thomas Linderman Graham.

Early this year, the brokerage predicted that the region's office vacancy rate would climb to 20 percent. Now Raiford thinks at least 25 percent of the region's offices could be longing for tenants before the year is out.

In other words, more pain could come for landlords, who haven't had it this bad in a while.

In the middle of this decade, when the economy was fluid, companies were moving to and expanding in the Triangle at a rapid clip. Rents went up and concessions such as free rent and interior construction allowances faded away.

Now, with more empty space and fewer tenants, landlords are competing more with each other -- and their own tenants. Almost 875,000 square feet of offices were available for sublease, which pinches landlords because subleased space is usually offered at reduced rates by shrinking companies hoping to stem losses.

As a result, asking rents are leveling. Average asking rents in the region's newest office buildings were up just 0.3 percent to $21.75 per square foot on an annual basis. That's down from a 5.3 percent increase in the previous year.

This could be particularly troublesome to some investors, but it hints at bargains to come for renters.

In recent years, investors swarmed the market, snapping up office buildings at record-high prices, assuming demand would remain steady and rents would continue to rise.

But as tenants move out, some landlords -- particularly those who bought high -- could run into problems meeting debt covenants. That could lead to foreclosures or fire sales, allowing buyers to scoop up bargains and offer better deals than their rivals.

To be sure, fortunes could turn around for landlords if the economy swings up more than expected. After all, there's little competition coming out of the ground. Only 775,331 square feet of offices were being built at the end of the quarter. That's down 65 percent from a year ago.

One bright side to all this: With construction down, so too are construction-related deaths. There were only four of them in the state in the first six months of the year. That's down from 12 during the period last year and 16 in the first half of 2007, according to N.C. Department of Labor data. or 919-829-8917

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