I agree Amzn could find a less expensive place to be in other than Seattle.
What surprised me is Dallas. It appears that city is really the hardest hit in the country.
>>Call it the Great Land Rush of 2002 -- in reverse. Across the U.S., tenants are vacating offices as they retrench or simply go out of business. The surge in so-called sublease space, combined with empty offices in new buildings -- whose construction began in the turn-of-the-century boom -- is driving down rents while pushing vacancy rates to their highest levels since the 1990-91 recession. Vacancy rates in big-city markets, measured in single digits just two years ago, average more than 15% today and are twice as high in many suburban markets. And real estate trackers expect the amount of empty space to rise until at least mid-2003.
For businesses still shopping for new offices, the reversal means bargains galore. In San Francisco and nearby Silicon Valley, rents have tumbled by 50% or more since 2000's peak, while vacancy rates have leaped to 19%, from less than 2%. That's worked out well for CNA Financial. The Chicago-based insurer recently subleased space in a new complex in San Francisco's once white-hot South of Market district for $28 per square foot after the original tenant, Sun Microsystems (SUNW ), gave back the space. When construction began two years ago, Sun had agreed to pay $60 per square foot (see BW Online, 1/15/02, "A Moving Tale of Luck and Real Estate").
DEAL SWEETENERS. In addition, new tenants are demanding -- and typically getting -- goodies such as free or discount remodeling that amount to receiving a year or two of free rent. Another sign of the times: Equity Office Properties Trust (EOP ) has cut its "rollover" lease in half, to 18 pages, and expects to shorten the contract by three more pages to make things easier on tenants. "It has turned from a landlord's market to a tenant's market," says Jacque DuCharme, president of leasing agent Julien J. Studley.
The bottom has also fallen out in Dallas and Atlanta, where vacancy rates now top 20%, according to Torto Wheaton Research, which monitors commercial real estate. In Minneapolis/St. Paul, businesses now occupy 3.3 million square feet less than they did at the start of 2002. That's the equivalent of emptying out 1½ Empire State Buildings. Vacancy rates are also soaring in Chicago, Los Angeles, Boston, and Seattle, as current tenants pull back and yet more office towers open.
The givebacks provide one-time revenue boosts to landlords. EOP, the nation's biggest office-building owner, says tenants handed back 1.8 million square feet of floor space in the third quarter. That included Inktomi (INKT ), a Web-search outfit that's paying EOP $50 million to walk away from a never-occupied building in Silicon Valley. Another that paid up earlier this year: Sun, which forfeited $85 million to bail out of its South of Market lease in San Francisco. Chicago-based EOP now projects it'll collect up to $140 million in early-termination penalties this year, almost 10 times the usual rate.
MANHATTAN MUSCLE. The windfall wasn't enough, however, to offset a 12.5% decline in new rental rates in the third quarter or a near-doubling in its vacancy rate to 11%. As a result, EOP reported Oct. 28 that its net income slumped 17% from last year's third quarter, to $168.2 million. Subsequently, Lehman Brothers analyst David Schulman downgraded his rating on EOP to "underweight," putting a new target price at $22 per share. EOP stock closed Nov. 6 at $25.41, down 20% for the year and near a 30-month low.
Still, a few relatively strong markets still exist. Vacancy rates in Manhattan -- far and away the nation's No. 1 office market -- are below 10% overall, due in part to the loss of 11 million square feet of office space from the September 11 terrorist attacks at the World Trade Center. Vacancy rates in central Washington, D.C., also remain in the single digits as the federal government and law firms continue to demand more space.
CarrAmerica Realty, for instance, has nine projects under way in Washington, including a $145 million new headquarters for the International Monetary Fund. And though vacancy rates are high in Chicago and Seattle, at 16% and 15%, respectively, businesses in both markets are occupying more space than at the start of 2002.
"BEST VALUES EVER." New York's vacancy rate, at 9% today, is rising. Layoffs are spreading in the financial-services sector in its Downtown market, and big corporate renters in Midtown are starting to return space as they move to cheaper quarters Downtown or new towers in Midtown. Already, rents in Manhattan are down 20% or more in the last two years, and Downtown's vacancy rate has quadrupled to 13%. "Tenants who are in the market to buy space today are going to get some of the best values ever," reports Peter Riguardi, president of the New York region for property managers Jones Lang LaSalle.
EOP Chairman and CEO Samuel Zell doesn't see his lot improving until job growth takes off. And when will that be? Judging by the last "jobless" recovery a decade ago, he says maybe a year from now, and it'll be a couple of more years after that before payrolls really increase and landlords have the upper hand again. Ditto, says Mortimer B. Zuckerman, chairman of Boston Properties, another big landlord in the office sector.
Will Rogers once advised folks to buy land because no one is making any more of it. These days, though, no one seems to want the space that's already there.
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