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Bay Area Office Market 'Distressed'

SAN FRANCISCO-The Bay Area office market is officially a distressed market, says a recent Merrill Lynch report, meaning supply and demand are so out of whack that it will be several years before rental rates fully recover.

By Michelle Savage | Updated on October 15, 2002

SAN FRANCISCO-According to a new national report on the commercial real estate market by Merrill Lynch, the Bay Area is considered a “distressed market”, meaning that the imbalance between supply and demand for office space is so high that market rates will probably stay depressed for many years to come.

The Merrill Lynch report labels nearly half of the 86 markets that it studied as distressed, including the Bay Area and Southern California. It indicates that the national office vacancy rate rose from 15% at the end of 2001 to 17% at the middle of 2002. In addition, statistics show that there is little hope for a recovery in the next 18 months. In fact, vacancy rates may hit 18% by the end of 2003, says Merrill Lynch.

Merrill Lynch reports that the lack of demand for space is the major cause of the gloomy office market, with nationwide demand shrinking about 4.5% in the last 18 months. Landlords are competing for tenants, which is leading to decreases in rental rates.

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