Commercial, residential rents fall in 65 major U.S. markets

California offices lead nation with 6 to 7 percent drop

Janet Morrissey, Dow Jones Newswires Thursday, August 23, 2001

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New York -- Rents continued to tumble in major markets across the country during the second quarter, with California posting the biggest declines, according to the latest study by the National Real Estate Index.

The study, which surveyed 65 U.S. markets, found rents fell in all property types -- office, retail, residential and warehouse. "This data puts a tangible face on the country's economic slowdown," the study said.

Average office rents in central business districts, or downtown areas, of major markets fell 3.2 percent between the first and second quarters of 2001. The decline marked the largest quarterly drop in rent since the early 1990s, the study said.

However, downtown office rents were still 2.3 percent higher than year-ago rent levels.

Suburban office rents slipped 2.2 percent between the first and second quarters.

Even apartments, which had been enjoying rent increases during the first quarter, saw rents tick down 0.4 percent during the second quarter. Retail rents declined 0.3 percent and warehouse rents dropped 0.5 percent during the same period.

California took the biggest hit. Downtown office rents plunged 6.2 percent, suburban office rents were off 7.1 percent and warehouse, retail and residential rents fell between 1 and 2 percent.

The new-economy meccas of San Francisco and San Jose experienced even sharper declines. Downtown office rents plunged 14 percent in San Francisco and 8 percent in San Jose, while suburban office rents dropped 12.5 percent and 19 percent, respectively.

"We're seeing the ripple effect from the reversal of the general economy,'' said Jack Doyle, property research manager at National Real Estate Index, a unit of CB Richard Ellis Services Inc. The rent declines were across the board,

which means "it's not just a dot-com issue. The recessionary situation is affecting all sectors,'' he said.

The study's findings appear to back up comments made by many real estate investment trust executives when discussing their second-quarter results. Many executives reported a rise in sublease spacing hitting many of the major markets, and many found it was taking longer to lease space.

Some REITs put certain development projects on hold until the economic environment stabilizes. Others insisted that 50 percent or more of a development project's space be preleased to a high-credit quality tenant before putting a shovel to the ground.

Even this latter tactic isn't without risk. Boston Properties Inc. has about 5.2 million square feet of commercial space under construction, including two sites at New York's Times Square. Although Boston Properties had signed accounting firm Ernst & Young to a 20-year lease for virtually 100 percent of the first Times Square site almost two years ago, Ernst & Young this week scaled back its real estate needs and said it will be subletting four floors of this space.

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/08/23/BU230178.DTL&type=business

-- Martin Thompson (mthom1927@aol.com), August 23, 2001