'Zombie Buildings' Raise Questions on Vacancy

SANTA ANA, CA-The amount of available office space in the US may be less than vacancy rates suggest because some landlords can’t provide tenant improvements that would enable them to compete for tenants, according to Grubb & Ellis Co. Robert Bach, senior vice president and chief economist for the Santa Ana-based company, says that so-called “zombie buildings” are listed in the inventory of vacant space but―for all practical purposes―are not really available because these properties “have significant capital constraints and are therefore unable to fund market-level tenant improvement allowances and commissions, which adversely impacts their ability to compete for tenants.”

“The amount of available space in the office market nationally may actually be overstated,” Grubb & Ellis says. The zombie buildings, combined with the phenomenon of shadow space, present a difficult proposition for anyone trying to accurately calculate the amount of office space that is actually vacant and available in the US. Shadow space is office space that users are leasing but not occupying because they have downsized their staffs. Researchers like Bach and like Arthur Jones of CBRE Econometric Advisors know the shadow space is there, they just don’t know how much. They say that the amount of shadow space is one of the unknown numbers that will play a key role in when and how quickly or slowly the US office market recovers. The problem with trying to tally shadow space, however, is that―although it is empty because the workers who once occupied it have been laid off―it doesn’t show up on vacancy reports. Technically, it still counts as occupied space because the tenants who are leasing it have not vacated it or offered it for sublease.

When combined with the difficulty of calculating how much space is off the market, in a sense, because of zombie buildings, the phenomenon of shadow space further muddies the picture. Bach says that, regarding zombie buildings, “Now that the values of many properties purchased during the peak of the market have fallen below the balance due on the loan, some landlords are too capital-constrained to offer the tenant improvement allowances and other concessions necessary to attract tenants in today’s marketplace.”