Looking for office space? You're in luck

The "space available" signs outside the region's office buildings tell only the start of a story expected to worsen:

Tenants are moving out.

Layoffs and business closings have reduced the need for cubicles and conference rooms, driving up the region's vacancy rate in the office market to more than 15 percent, according to first quarter 2009 data released Friday.

Because commercial real estate is a lagging economic indicator - it takes months for a company's problems to translate into its downsizing - experts predict the darkest point for the industry in this recession might not come until next year.

"There are definitely clouds on the horizon," said Matthew Wright, research manager at Grubb & Ellis, the national commercial-real-estate-services company that compiled the office-vacancy statistics.

As regional director for Liberty Property Trust, a major landlord in this region with about 10 million square feet of office space, Jim Mazzarelli offered this assessment of his world:

"It's a fight. Everybody is trying to fight to live another day."

What it amounts to is a renter's market, where several months of free rent can be gotten to seal a deal and where landlords are now willing to agree to shorter lease terms.

"Everyone's directive is: 'Do not lose a tenant to another property,' " said Anne Klein, a broker in Grubb & Ellis' South Jersey office division.

Center City, South Jersey, the Pennsylvania suburbs and Wilmington make up the regional market analyzed by Grubb & Ellis. The study covered all single- and multi-tenant buildings of at least 20,000 square feet and excluded owner-occupied, government, and medical buildings.

It is a region of 133 million square feet of office space that has logged three consecutive quarters of net decreases in occupied space.

Since last July, tenants have vacated 945,000 square feet, boosting the overall vacancy rate to 15.2 percent as of March 31. That is up from 14 percent a year ago and from 13.7 percent in fourth quarter 2007, the official start of the recession.

In a submarket-by-submarket analysis, Center City gets bragging rights with the lowest vacancy rate - 11.3 percent. Yet, that was up from 10.9 percent a year ago. A total of 188,000 square feet of "negative absorption," the industry term for tenants occupying less space than they used to, was recorded for the first quarter of this year.

That does not include the 170,000 square feet that have housed the Wolf Block law firm, whose partners decided last month to dissolve the practice.

Real estate analysts still consider the market healthy because, according to the Grubb & Ellis study, 55 percent of the inventory has single-digit vacancies - with 10 buildings accounting for 40 percent of the empty space.

Nine of those buildings are in the West Market submarket, the area west of City Hall along Market and Arch Streets and JFK Boulevard, where 62 percent of the total office space in Center City exists. Given that concentration, its new role as biggest contributor of vacant space is not considered surprising.

Worth noting is the city's glitzy so-called "skyline" buildings - including the Comcast Tower and Liberty I and II - remain popular addresses with a collective vacancy of 6 percent, according to Grubb & Ellis.

Vacancy rates for the rest of the region were: South Jersey, 14.8 percent; Pennsylvania suburbs, 16.8 percent; and Wilmington, 19.3 percent.

Rents themselves have largely held steady at a regional price of $27.64 a square foot for quality space known as Class A. That's 19 cents cheaper than a year ago.

While Class A rents in Center City and the Pennsylvania suburbs have held firm, they have dropped 8 percent in South Jersey and 4 percent in Wilmington over the past year.

Rent breaks are more likely for deals involving smaller blocks of space - such as 10,000 square feet. Such sites are far more plentiful than, for instance, those measuring 100,000 square feet.

Typically, it is the users of smaller spaces that are "also apt to get into financial trouble and come to you to try to renegotiate," Mazzarelli said.

Given the broad-based economic suffering, "no" is not a reasonable response from landlords, he said.

"Right now our customers are hurting," Mazzarelli said. "We need to keep them in business, because that's why we're in business."

For some companies, surviving has meant subleasing space no longer needed. Sublease space in the region increased 42 percent over the past year to 3.6 million square feet, its highest level in four years, said Wright, the Grubb & Ellis research manager.

Though office vacancies are expected to continue to grow, a period of slashed rental rates is not anticipated. That's because the region was not overbuilt when the recession started.

"While many regional office markets are bloated with robust development pipelines which will add millions of additional supply into a softening market, our pipeline continues to decrease and is currently at its lowest level of the past four years," Wright said.

Grubb & Ellis identified just seven projects with near-term delivery dates - five in Bucks County and one each in Montgomery County and Wilmington. They would add 631,000 square feet to the region's office supply within the next 12 months.

By comparison, the Washington regional office market has 11.8 million square feet under development; New York City, 6.1 million, and Seattle, 5.5 million.

In other words, said commercial broker David Binswanger of this market: "It's not all bad."

While more office vacancies are in this region's future - the announced mergers of pharmaceutical companies are fueling those predictions - Binswanger said businesses are looking for relocation space.

Among those he has guided is VWR International L.L.C., a global laboratory supply and distribution company, which announced in January it will move next year into a 150,000-square-foot, yet-to-be-built headquarters in a mixed-use development planned for the former Worthington Steel Plant site along Route 202 in East Whiteland Township.

In the process, it will vacate 100,000 square feet of office space it leases in East Goshen Township.