Fitch: Chicago, San Francisco, Dallas Office Markets Continue to Struggle

The nation’s office market is weak, but some areas are faring far worse than others, reports Fitch Ratings. Between the beginning of 2000 and 2003, U.S office vacancy nearly doubled from 8.6% to 16.9% according to Fitch.

"The decline in most office markets has been dictated more by a lack of demand than by oversupply, which was the principal source of trouble in the 1990’s real estate downturn," says Geraldine Keegan, director at Fitch Ratings.

Fitch singled out Chicago, San Francisco and Dallas as having office vacancies that currently exceed the national average. All three metropolitan statistical areas (MSA’s) were impacted by several late 1990’s trends: high-tech consolidation, corporate layoffs and a sour economy. But subtle differences within each market were also at work, the Fitch report notes.

In San Francisco, the dot-com hangover is still wreaking havoc on the office market. Meanwhile, older properties are having trouble competing with their younger counterparts. Fitch warns that the former properties will likely struggle over the next few years.

Average rents here have sunk dramatically. Since 2000, Class-A rental rates have nose-dived 60%, more than any other U.S city, to roughly $31 per sq. ft. Landlords have willingly shaved 10% off the asking rent, reports Fitch.

In Dallas, Fitch projects that companies will continue to lease space in this market in the near term, but the CBD will be the last area to recover. With CBD vacancy nearly 50% for Class-B and Class-C properties, this area will several years of positive absorption to reach equilibrium.

Chicago will suffer from a string of new office buildings set to be finished this year. This new supply will only increase inventory by 1% in the Chicago CBD, according to Fitch, but it may delay a rebound in office occupancy in suburban Chicago.

TAGS: Office
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