Commercial office market to bottom this year

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The U.S. commercial-office industry is showing signs of eventual recovery.

In his first-quarter report, Grubb & Ellis national economist Bob Bach said the commercial-office market is poised to bottom out by year-end.

The biggest surprise of the quarter was a slight uptick, 1 percent, in the average asking rental-rate for Class A space to $31.10. The average Class B-rate was $23.00, an increase of 0.8 percent.

However, the market’s full recovery is still inconclusive.

“This data series is volatile, so it is unlikely that rents have stabilized while the vacancy rate continues to rise,” Bach said.

Although there have been anecdotes of landlords in Class A-properties in primary markets “pulling back” on their concession packages, this would most likely impact effective rates before asking rates, he said.

“It will be interesting to see if the market can sustain this plateau next quarter,” he said.

In a more definitive sign of recovery, sublease space offered on the market decreased to 113 million square feet – down more than 10 million square feet over the past two quarters.

One possible takeaway from Bach’s report: With national commercial office market prices at low ebb, investors waiting for the best deals are likely to begin buying again.

Here in the Pikes Peak region, the Turner Commercial Research first quarter report hasn’t yet shown an upward trend.

Locally, the office vacancy rate remained at 16.1 percent. Class A-properties space declined to 21.8 percent from 22.2 percent for fourth quarter 2009. Medical office space saw some of the greatest absorption, with vacancies falling to 14.7 percent from year-end’s 15.7 percent levels.

While asking rents declined by 4.4 percent during 2009 and another one-half percent during first quarter 2010, the Turner report said some landlords remain “out of synch with market realities.”

The report points to about 4.6 million-square-feet of vacant space in the market, spurring owners to drop per-square-foot rents well below the published asking rents.