Office Market On The Road To Recovery?

PRNewswire-FirstCall - October 1, 2003

Myth or reality: Commercial office rental rates have hit bottom in most markets? Answer: MYTH. A new study by PNC Real Estate Finance and Grubb & Ellis Company finds that rents continue to fall, but that the rate of decline is slowing. It clearly remains a tenants' market, and will remain so well into 2004, according to the report.

Other findings reported by PNC Real Estate Finance and Grubb & Ellis in "Myth or Reality: No Worse, No Better, No Hope? Catching Up With the Office Market," include:

- Myth or reality: The market faces a problem of under-demand, not
oversupply. REALITY, but does it matter? The bottom line is that,
nationally, vacant space has increased by 245 million square feet over
the past 2 1/2 years -- the equivalent of emptying every office
building in Chicago and then some.

- Myth or reality: Tenants are taking advantage of low rates to upgrade
their space. MYTH, so far. Tenants have remained fiscally
conservative and the gap between "A" and "B" rents has not narrowed to
the point to encourage mass migration.

- Myth or reality: Lease terms are lengthening as tenants use their
bargaining power to lock in longer terms at lower rates. Myth.
Although great deals are available, tenants remain opposed to signing
long-term leases at a time when the direction and stability of the
economy is still questionable.

- Myth or reality: Smaller tenants are more active than their larger
counterparts. REALITY. The average lease size has declined by 40
percent over the past three years. Large companies are still more
likely to consolidate or downsize space requirements, while smaller
tenants are more agile, acting as leaders in recovery.

While an economic recovery may be underway, it remains a jobless recovery. Getting back to a 10 percent vacancy rate (from today's 17.6 percent) will require absorption of about 250 million square feet of office space. A normal annual absorption pace is about 50-60 million square feet. Several quarters of job growth will be required to determine how the office market will respond.

A complete version of the office market report is available online at either:
http://www.pncrealestatefinance.com/REMarketResearch.htm or
http://www.grubb-ellis.com

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