A Bloomberg news report says Silicon Valley has the biggest office space glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.

More than 43 million square feet of office space stood vacant in the third quarter of last year -- that's the equivalent to 15 Empire State buildings and a vacancy rate over 21% for the silicon valley area.

Asking rents averaged $34.56 a square foot for Class A space in the third quarter, 21 percent less than a year earlier. The rate for flex space was $14.16 a square foot, down 16 percent, according to CB Richard Ellis.

Commercial property foreclosures will at least double in 2010 and job growth is not expected to return for two years after that, held back by U.S. consumers who are saving more and changing their spending habits.

Unemployment in the greater San Jose area was 11.8 percent in November.

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From Cushman and Wakefiled's Knowledge Center

"THE AMERICAS: LOOKING UP

Things are looking up for a recovery and job growth in 2010 that will benefit North American real estate markets. Meanwhile, South American countries such as Brazil will continue to heat up.

National real estate markets are likely to remain weak particularly early in the year due to uncertainty about the strength of the recovery. This will benefit tenants seeking to secure moderately priced space.

But as recovery takes hold, markets will reach a bottom and begin to improve. The key will be employment growth which, because of the depth of the downturn, may turn out to be stronger than is generally anticipated."

What struck me in this quick overview is that the bottom is a ways away. With last weeks jump in newly laid-off workers filing claims for unemployment benefits, the recovery may be further away than we hope. Unemployment is directly linked with office vacancy. Businesses must add employees to take on additional office space. I believe that there is still a lot of underutilized office space that companies have leases on, but are not using that will have to be filled before we see any reduction in the office vacancy rate. A recovery in 2010 would be great, but I believe the Office Space market will not start it's recovery until 2011.

I am off next week. Happy Holiday to all.

"Cost cutting is still going to be the highest priority" for corporate real estate in 2010, Peter Riguardi, president of Jones Lang LaSalle’s New York region, said in a webcast on office occupier trends Wednesday afternoon. That’s because economizing remains a watchword for many companies, and reducing real estate expenses--whether through blend-and-extend leases or outright shedding of space--represents low-hanging fruit.

Blending and extending, which has come back into favor in the current leasing market, will remain a big trend for the foreseeable future, Riguardi said. It’s one of many opportunities for tenants in these days of reduced rents and greater landlord concessions. The current climate also offers plenty of chances for upgrading the location and the space, and for using market leverage to enhance non-economic lease provisions.

Full Article: For Tenants, It’s About Shaving Costs

Another contributor to the problems to come in the Commercial Real Estate market.

According to Loopnet "Commercial property prices, as measured by the Moody's/Real Commercial Property Price Indices, or CPPI, are now 40.6% down from their October 2007 peaks.

The all property-type index fell 3% in August to 114.06, which is down 32.8% from a year ago.

The national office index value actually increased in the second quarter by 4.1% from the first quarter to 128.96. But it's down 27.4% from two years ago.

Each of the remaining property sectors - industrial, multifamily and retail - saw declines in the second quarter when compared to the first. Industrial values were down a whopping 20.4% from the first quarter to 131.3; multifamily was down 16.3% to 131.93, and retail was down 7.9% to 138.3."

Chart Source: Real Capital Analytics

What does all this mean to the office tenant? According to the report, Landlords have lost over 27% of the value of their buildings over the past 2 years.  As I mentioned in a previous post, it is imperative for the prospective tenant to know what the financial situation is for the building that they are considering occupying. An average loss in value of over 27% means that some have lost more while other less. This is a situation that can be compared to that of residential short sale, where the value of the building is less than the mortgage outstanding. Many owners just walk away in these situations and it can happen with office buildings as well.

The key for the prospective tenant is to make sure that they have a non-disturbance clause in their lease agreed to by the Lender, not just the Landlord. The last thing you want to have happen is to be evicted without notice. Tenants and prospective Tenants need to know what is going on with building financing.  It is not always easy to find out. This is another good reason to work with a tenant representaive who knows your market.

According to Wells Fargo Economics Group "The Recovery Will Be Agonizingly Slow. So it indeed has been. As this short quote from the Executive Summary of our 2009 Annual Outlook (published in December 2008) neatly summarized, the economic recovery faces a number of secular challenges that will alter the pace and composition of growth. For many decision-makers, the outlook for 2010 suggests continued change and adjustment to an altered reality of more government/less private sector contributions to growth, greater caution/less leverage for consumer spending, greater prudence/less speculation in lending and the importance of exports in moving the U.S. economy."

This related to the glut Office Space for lease means that we have a long wait until the markets start to tighten up, probably in the neighborhood of 2012. Employment is the key to filling office space.  As long as the employment numbers are negative we will continue to see more office space become available. Even when the employment numbers begin to grow, office space for lease will still lag behind while companies fill the spaces they still have under lease, but have not been using, with their new employees.

This is bad news for Landlords, but good news for Tenants. Tenants will be able to call the shots, but will need to be careful. One of the big problems that arises in such a weak market is that of foreclosure by lenders on office properties in which the owners are unable to meet their obligations. Tenants and prospective Tenants need to know what is going on with building financing.  It is not always easy to find out. This is another good reason to work with a tenant representaive who knows your market.

Much attention is generally paid to subordination clauses in on office lease, but that is not enough. A key clause to make sure you are protected and not put out on the street in the event of a foreclosure is a non-disturbance clause. In these turbulent times you may even find that it is not enough to just have this in your lease, but also need to have it agreed upon by the Lender. A good tenant representative in conjunction with a good real estate attorney can make sure you are protected.  Dont' skimp on this. It could be a big problem.

More inforamtion on Tenant Representatives.