According to a report released by Reis Inc., a leading real estate research firm, the US office market vacancy rate has surged to 15.9% in the second quarter of 2009 – the highest in four years. With deteriorating demand for office space, rent decreased by 2.7% during the quarter – the largest plunge in seven years.
Most real estate companies were forced to lower rents to attract and keep tenants. In addition, tenants are demanding more concessions in the form of free rent and capital improvements.
During the quarter, asking rent in the office segment decreased 1.4% to $28.43 per square foot. Taking into account the rent-free months and improvement costs to landlords, effective rents or net cash received as rent decreased 2.7% in the quarter to $23.42 per square foot. Consequently, with decreasing cash flows the risk of loan defaults has increased considerably in the office segment.
According to Reis, the US office market has declined at a steady pace since the third quarter of 2007 when vacancy was 12.5%. The weakening office market does not bode well for most real estate investment trusts (REITs) like Liberty Property Trust (LRY), Mack-Cali Realty Corp. (CLI), and Cousins Properties Inc. (CUZ).
Based in Pennsylvania, Liberty Property focuses primarily on prime suburban properties in the Southeast, Mid-Atlantic, and Midwest regions of the United States. Fundamentals are declining in most of the company’s office markets as corporate expansion continues to slow. We are projecting negative rental growth rate on new/renewal leases in markets that are characterized by high vacancies and negative job growth. We reiterate our Sell rating of Liberty Property.
Mack-Cali Realty owns, leases, manages, and develops Class A office and industrial/flex properties, primarily in suburban markets in the northeastern US. We think the company will have a difficult time raising rents as leases roll over the next couple of quarters. We don’t think the company can continue to outpace occupancy market averages over the long term. We maintain our Sell rating of Mack-Cali Realty.
Atlanta, Georgia-based Cousins Properties controls properties throughout the U.S., in the office markets of Atlanta, Charlotte, Austin, San Francisco, Los Angeles, and Washington DC. Many of the company’s office markets – Atlanta, Austin, Birmingham, Dallas, and Charlotte – are seeing large jumps in office vacancies. With high market vacancies and no job growth in most of its markets, growth of rental rate on new leases will be non-existent for some time. We reiterate our Sell rating of Cousins Properties.
Read the full analyst report on “LRY”
Read the full analyst report on “CLI”
Read the full analyst report on “CUZ”
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