That being said, absorption is negative no matter what source you use, meaning companies are still shrinking on the whole, and less space is being occupied than marketed. “The year-to-date absorption rate, a measure which indicates the net change in occupied space, was negative 441,498 square feet at midyear 2010, a 98 percent increase in absorption from the negative 24.9 million square feet at midyear 2009.” – a Cushman & Wakefield report.
A recession breeds new competitors and different market dynamics. Some fundamentals remain the same: landlord concessions, tenant demand and the quintessential battle for leverage. However, markets across the US are seeing new tenants, new industries and new economic forces emerge.
The Wall Street Journal noted the leasing market has boasted some atypical tenants around the country: Non-profits and boutique financial services firms born from the aftermath of the Great Recession buoy the New York market.
Governmental agencies’ role
Additionally, the governmental agencies continue to expand, despite President Obama’s promise to reduce the Federal Government’s CRE footprint, “In Washington, the Securities and Exchange Commission recently leased 200,000 square feet and is considering taking more.” WSJ. Office Vacancy Rate Keeps Climbing.
San Francisco has facilitated strong emergences in biotechnology, solar energy, cloud computing and social gaming. Harsh market conditions have created fierce competition for venture capital, government funding via bailouts and creative strategies from brokers and CRE professionals. On the other hand, traditional companies have been hit hard, and the bankers, lawyers, consultants, etc have consolidated and shrunk.
Some of the prodigious deals in San Francisco come at a negative net to the overall absorption. Law firm giant Morrison & Foerster inked the biggest deal of the year in San Francisco, totaling 220,000 square feet for 17 years, but took on 50,000 square feet less than previously occupied, similar to Deloitte (negotiating deal for 100,000 square feet less than their previous deal), Wells Fargo (vacated 350,000 square feet in San Francisco), along with many other larger institutional users.
Pockets of tenant competition
While there are pockets of tenant competition around the country in which Landlords can be competitive on pricing and concessions, the good credit tenants of significant sizes are still king.
The unemployment still teeters on recessionary levels on many local markets and 9.3% nationally, and the vacancy and rental rates will remain suppressed or stagnant, some experts say, until 2012.
“Businesses have to feel very confident that they will ultimately not only replace the 8.2 million jobs lost in this recession, but that they will grow payrolls even further,” says Sam Chandan, global chief economist and executive vice president at researcher Real Capital Analytics. “That’s when you begin to see very strong positive absorption.” National Real Esttate Investor Online. Office Tenants and Landlords Battle for Upper Hand.
What will decide growth?
Employment will be the deciding factor for growth nationwide. Expect to see more of the same in the second half of 2010: leveling out of vacancy rates, more consolidations and possibly a bottoming of rental rates. The green shoots will continue to be technology companies, solar energy and biotech. Large tenants will continue to blend and extend leases and take advantage of the favorable market conditions by inking longer term deals.
The market will not return to 2005-2007 levels for quite some time, but the recession has created a new reality that the market is finally adjusting to.
