Office Rental Rates Falling as Demand Slides: Part 1

It should be no surprise that rental rates for office space have weakened as demand declines.  Nationally, rents for office space fell 1.2 percent during the fourth quarter of 2007, even though owners offered concessions such as free rent for a limited time frame to lure users.  According to Reis, Inc., a New York-based real estate research firm, rents declined in 65 out of the 79 national markets it tracks.

During 2008, office tenants walked away from 42,000,000 SF of space, which brought the U.S. vacancy rate up to 14.4 percent, compared with the 12.6 percent reported just one year ago.  Vacancy rates are expected to continue to rise through 2010, which will put even more downward pressure on rental rates.  Given the overall volatility of the real estate market, just how low rental rates will go is anyone’s guess.

The one bright spot is the deflationary economy, which has lowered energy prices and other commodities.  This may provide relief to owners faced with lower rental income at a time when covering their debt obligations may be a struggle.