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Commercial Real Estate Continues to Soften

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According to data provided by Grubb & Ellis Company, the commercial real estate market may be indicative of the overall trepidation felt about the economy.

The astonishing rate of softening in the in the second quarter has accentuated the fears that the commercial real estate sector may be the next to weigh heavily on the economy’s shaky shoulders.

At the end of the second quarter, the national vacancy rate jumped 120 basis points to end the quarter at 10.7%. This staggering rise was the largest one-quarter gain in the 22-year history of the Grubb & Ellis survey and broke the previous record vacancy rate jump of 70 basis points that was set at the end of the first quarter.

Interestingly enough, for a city in a state mired in debt, the vacancy rate in Los Angeles County was the lowest at 3.1%, while obviously enough, vacancy was the highest in Kalamazoo Michigan at 19.7%.

Net absorption–the figure coined to mean the square footage of offices vacated minus the square footage of new leases of space–was deep in the red for the second quarter with a negative 43 million square feet vacated. This was on in addition to the 40 million square feet vacated in the first quarter. Attention was being paid to this massive exodus and only 13 million square feet was completed, the lowest quarterly total in five years.

The downward spiral was felt throughout the industry and the average asking rental rate for various types of industrial space offered on the market at the end of the quarter declined 2.7% from the quarter a year ago. While the average effective rental rate declined 22% over the last four quarters due to altruistic periods of free rent and other concessions made to keep tenants in properties.

“The vacancy rate during the second quarter was the fastest pace of softening among the four core property types. The drivers of demand, for industrial space–retail sales, logistics, global trade, and the construction industry–all have taken a big hit during the recession. The sharp increase in the second quarter vacancy rate to 10.7% raises the possibility that the market may come close to the previous record of 13.7% posted in the first quarter of 1992,” according to Bob Bach, Senior Vice President, Chief Economist at Grubb & Ellis in his outlook.

Michael K. Stanley can be reached at [email protected].