Jim Costello, senior economist at Torto Wheaton does not think the commercial real estate market is in real trouble. "On the face of it when you see the big negative absorption rate, you could think the market is going in the tank," he tells GlobeSt.com. "But when you take it apart, you see a lot of sublease space in there."
According to Costello, in the first quarter 20 million sf came into the market but 17 million of that space was sublease space. "The core demand was three million sf," he points out, which suggests a slowdown. This could be due to a combination of two concurring events--first, the jobs report indicated that as many jobs were lost in the past month as were created in the entire first quarter. Also, while tenants do have business that needs space it could be that many are waiting to see how the market will play out.
Costello adds that it is unclear whether rents will fall significantly. The vacancy rates are currently 9.5%. Even in the late 1990s, there was an 11% to 12% vacancy rate," says Costello. "Some might not feel the competitive pressure. We might have an extended period where the rates are figured out."
Boston's office absorption rate was a negative 2.37 million sf this quarter as compared with last quarter's positive rate of 1.2 million sf. "It's a big swing," acknowledges Costello. "There was a general slowdown in markets that had high exposure to the high tech sector."
Costello notes that this area gave up a lot of sublet space--1.807 million sf. That leaves only 230,000 sf of negative net absorption occurring from core demand. "For Boston to come in with a quarter like that is not such a big deal," says Costello, who says that the sublease space lifted the vacancy rates from 3.9% to 5.9%.
"If you pull apart the difference between sublease space and the core element of demand it's clear that the market has stalled but that it will come back as soon it adjusts to the new rate realities," points out Costello. "All is not lost. If the fundamental elements were driving all this negative absorption that would be bad."
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