Office space starting to empty out

Given the current economic malaise, businesses aren't waiting to cut down on their office space expenses when they downsize. Factor in a long-term trend towards flex time and home offices, and is this a temporary blip or something more? From the Wall Street Journal:

Businesses are dumping office space at the fastest pace since the months after the Sept. 11 attacks, increasing the financial stress on commercial-real-estate owners and their lenders, many of them already ailing financial institutions. Nationwide, rents on office properties -- including landlord concessions and discounts -- were flat in the third quarter, the worst result for office-property owners since late 2004 -- when commercial real estate began to emerge from a prolonged slump, according to Reis Inc., a New York real-estate research firm...

The office market in suburban areas and smaller cities has been declining throughout the year. But now, with a recession looking inevitable, the pain is spreading to most large metropolitan areas. Previously immune cities such as San Francisco and Boston saw vacancy-rate increases in the third quarter. San Francisco's vacancy rate rose 0.6 percentage point to 9.9% in the quarter. Boston's rate rose 0.8 percentage point to 11.7%.

Of the 79 markets Reis tracks, vacancy rates increased in 66. Rents declined or were flat in 40...

Commercial real estate so far has fared much better than residential. Cash flows of most properties have stayed healthy and delinquency rates on commercial mortgages have remained low. Unlike the real-estate collapse of the early 1990s, the market also hasn't suffered from overdevelopment.

But the office sector has been suffering declining values from the shortage of financing. Now the problems are beginning to be compounded by declining rent, rising vacancies and mounting expenses for attracting and retaining tenants. This will add to the strain on financial institutions that already have been stuck with tens of billions of dollars of commercial-real-estate debt and securities. Many of them may choose to sell this troubled debt to the government if Congress passes the proposed bailout legislation.

Because real estate moves slowly, the financial turmoil of the past few weeks hasn't yet showed up in the numbers. Mr. Chandan predicted the bank failures and consolidations will be reflected in office space later this year and in 2009...

The worst-hit office markets continue to be the ones bearing the brunt of the housing crisis. Businesses tied to the housing industry, such as home builders, engineers and mortgage lenders, have evaporated, leaving behind acres of empty cubicles.