A New Storm's for Office Market

 Mushrooming in Office Markets Throughout The Country

Penn Mutual Towers, an office complex across the street from Independence Hall in Philadelphia, has seen its vacancy rise and income fall after one big tenant left and another renewed its lease for 15% less than it had been paying. Its creditors are foreclosing on the property, according to data company Trepp LLC.

Similar problems are mushrooming in office markets throughout the country, foreshadowing a new wave of real-estate trouble. While the housing market was at the heart of the most recent real-estate crisis, office buildings—the center of past meltdowns—until now haven't been a major source of concern. 

Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work.

To be sure, office vacancy rates have slowly improved in some markets as companies added jobs, and owners will benefit even more if the economy gains steam. Also, values of office property have increased in New York, Washington, Boston and other major cities, easing the stress on some properties.

For example, in New York, values of some office buildings are approaching boom-era highs, especially properties that are mostly occupied by credit-worthy tenants on long term leases. But six out of seven New York City's sub markets all have effective rents-which includes landlord incentives—down 15% or more since end-2007, according to Reis.




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