The United States office market trudged sluggishly through the third quarter of 2008, posting the fourth consecutive quarterly rise in vacancy, according to the Q3 office report from Colliers International. National office vacancies stood at 13.7 percent at the close of the quarter, back to vacancy levels last seen in Q4 2005, according to Colliers.

This upward trend in vacancy was reflected in both downtown (CBD) and suburban markets nationwide, with vacancy rates at 11.4 percent for downtown markets and 14.8 percent for suburban markets, Colliers said. The slowdown in demand for office space is consistent with a struggling national economy and ongoing contraction of the labor force, as we continue to feel the effects of the credit crisis - which shows few signs of abating, although credit markets are beginning to show signs of thawing.

Nationally, downtown Class A vacancy rose slightly from 10.0 percent in June to 10.3 percent by the end of September. In the suburbs, Class A vacancy increased from 14.3 percent to 14.9 percent. Market polling results showed 32 of the 53 downtown markets surveyed by Colliers posted a rise in vacancy, as did 49 of the 55 suburban markets surveyed.

Net absorption, or the change in occupied space, was negative for the third consecutive quarter, registering negative 2.24 million square feet (msf). Most of the space was returned in downtown markets, which gave back 2.63 msf collectively. The strongest demand for office space was actually in the suburban Class A markets - which saw 4.25 msf of positive absorption.

Consistent with the last several quarters, new construction measured 19.0 msf of newly completed office space nationwide. In line with absorption trends noted above, more than 90 percent of the new supply appeared in suburban markets.

Asking rents showed a slight softening during the third quarter, with downtown Class A lease rates off their Q2 average by 1.4 percent, clocking in this quarter at $49.39 per square foot (psf). However, this registers 1.7 percent higher than what was reported at the outset of 2008. Suburban Class A rents averaged $28.44 psf, down 1.0 percent for the quarter, and down 0.8 since the beginning of the year.

The third quarter also saw an increase in subleased space, characteristic of recessions. Indeed, office space that was available on a sublease basis increased four percent during the July through September period, and 13.4 percent year-over-year. There is currently 65.7 msf of space available for sublease on the market. This trend of companies subleasing their office space points toward economic weakness and can also be viewed as a negative harbinger of lease rates. The current level of sublease space, however, is well below the peak seen during Q4'02 – when sublease space totaled 142.9 msf.

"As the fourth quarter begins, we find ourselves bracing for what could be a fairly substantial recession," remarked Ross Moore, executive vice president and director of market and economic research at Colliers International. "However, there are a number of reasons why it could also be relatively short. Recent actions taken by policymakers have been unprecedented -- and the efficacy of these extraordinary steps will only become clear in future quarters. But without question, the economy will respond, and could do so more quickly and sharply than many expect. In addition, a new administration taking the reins in January will be seen as a fresh start, and could provide the bounce-back the economy needs.

"The commercial real estate market has been here before. This is a cyclical business and the current downturn will be followed by an eventual upturn. Commercial real estate is a lagging indicator, and as equities begin their bounce-back, so will go the economy and eventually the commercial real estate sector."