Nation’s office market should bottom out next year, brokerage says

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The nation’s long-suffering office landlords should finally hit the bottom of the rental market in the second quarter of next year, though it may take longer to get there in Southern California, a real estate brokerage said Wednesday.

Overall office vacancy will peak at 16.8% next year, up slightly from 16.6% in the third quarter of 2010, according to a forthcoming real estate trends report by CB Richard Ellis. After that the vacancy rate is expected to slowly decline, falling to 16.4% by the end of 2011 and to 15.3% by the end of 2012.

Increases in the numbers of leases signed lately vary by region and building quality. More than half of the markets that have showed positive gains in demand during the last year are on the East Coast, the brokerage said, where the tide has begun to turn for upscale offices in business centers such as New York, Boston and Washington.

The recovery will take longer in depressed housing markets such as California and Arizona, which relied heavily on housing and housing-related financial markets for economic growth during the last decade, according to a preliminary statement from the report expected to be released by early next year.

Tenants that are shrinking their office footprints, renegotiating their rents or taking advantage of falling rents to move into space that was previously unattainable to them are driving the current leasing market, the brokerage said.

“While vacancy is starting to improve, the high levels indicate that the rent recovery will be measured in terms of years,” said Arthur Jones, senior economist at the brokerage. “The process will take time and the outlook over the next year will remain subdued with little upward movement in rent.”

-- Roger Vincent