Commercial Real Estate: The Other Shoe Drops?

From the Sacramento Bee:

In the up-and-down world of office leasing, Roseville and Rocklin for years have been the closest thing around to a sure bet. Until now.

Demand for new leases is down. Office vacancies are up. And a lot more space is under construction. "After many years, South Placer County is changing from a landlord's market to a tenant's market," said developer Abe Alizadeh...."Incentives (for tenants) will be going up. Lease rates will be coming down."
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"It's frightening," said Elaine Hartin, a broker with 17 years of experience in the Roseville office of Cornish & Carey Commercial.
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The area's declining housing market has stifled the residential finance, insurance and real estate businesses that for years gobbled up office space. A glut of existing office space is for rent. A record level of offices are under construction.
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What concerns Strain, Hartin and others examining South Placer County's office market is an obscure but important statistic that they watch, much as a cardiologist watches a heart patient's blood pressure. The statistic, called "net absorption," measures tenant demand for leasable space. It takes the office square footage newly leased in a given three-month period and subtracts from it any vacated office space during the same time.
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For 55 consecutive quarters, stretching back to 1994, the Roseville and Rocklin market has not recorded a single negative absorption period, according to statistics compiled by the Sacramento office of commercial brokerage CB Richard Ellis....Residential finance companies fueled the winning streak in recent years as they flocked to South Placer County's booming housing market and drove demand for office space.
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Two years ago, office net absorption in Roseville and Rocklin hit 471,398 square feet for the year, roughly equal to eight football fields of office space. It was the best year ever for the region's office leasing, statistics show.

But from that peak, net absorption plunged to a seven-year low of 294,000 square feet in 2006, as the housing boom ended and the companies that supported it downsized or, in some cases, went dark.

"They've almost all cut back. Some put their space on the market, subleased or closed," said Jon Walker, a senior vice president at Grubb & Ellis' Roseville office.

Office demand has plummeted further this year. Roseville and Rocklin's net absorption fell to a meager 16,500 square feet for the first quarter, down from 109,000 square feet for the same period in 2006. Second-quarter figures are due next month."Obviously, things have dropped off," Walker said. "The question is, how long will it last?"
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"Roseville and Rocklin could potentially see 40 percent vacancies," [Chris] Strain [executive director of brokerage Cushman & Wakefield's Sacramento office] said. "And things won't come back to a reasonable level -- I'm talking about 15 percent vacancy -- for three years. And that's if the economy doesn't go south on us."
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[W]ith 868,508 square feet of office space sitting empty -- and another 868,000 square feet under construction -- it's unlikely the market will turn around in the short term, said Grubb & Ellis' Walker. "I'm not preaching doom and gloom, but you've got to be realistic," he said. "We've got a lot of questions to answer."