WSJ: Trouble in store for some office markets?

| January 11, 2012 | 0 Comments

Saw an interesting article in today’s Wall Street Journal, looking at the impact of the expiration of big leases from the last real estate cycle.  These leases from the last rent bubble are a mouse working its way through the snake of the market.  In some regions where rents are still soft, the impact on heavily leveraged owners who underwrote buildings based on inflated lease rates will be severe.

But what about in our local markets?  I think that the conventional wisdom would be that we’ll avoid this phenomenon here on the Peninsula and in Silicon Valley.   Some of the real trophy buildings in places like Palo Alto and Mountain View are actually enjoying higher rents than at the last peak, and owners there are probably welcoming big lease rollovers.  There may be some who think these submarkets have leveled off (me among them, but you get a lot of sideways looks when you claim that a market with near zero vacancy may be flattening out…), but there doesn’t seem much evidence of a correction of consequence in the pipeline.

Perhaps a different story for the rest of the region.  Rates for Class A product on most of the Peninsula remain far below the peak of ’07-’08, and vacancy rates are comparable.  A spot check of larger leases from that last market spike shows substantially higher deals getting done than are seen in the same buildings today.  Same is true down in Silicon Valley, though there may be more improvement to come there in the vacancy rate.  Heavily leveraged property owners with leases rolling this year could be in the odd position of a less profitable building in an improving market.

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