U.S. Office Rebound to Be Delayed by `Shadow' Space, Rosen Says

The U.S. office sector will be the slowest to recover as companies absorb empty space and advances in technology reduce the need for square footage, said Kenneth Rosen, a professor at the University of California, Berkeley.

Unoccupied “shadow inventory” accounts for 3 percent to 5 percent of total business leases, and that space will be filled before firms sign new rental agreements, Rosen, chairman of Berkeley’s Fisher Center for Real Estate and Urban Economics, said at a conference in San Francisco. Cloud computing and other tech advances let employees work away from offices, further reducing space needs, he said.

“Every company has shadow space,” Rosen, who also runs Berkeley-based hedge fund Rosen Real Estate Securities LLC, said in an interview yesterday. Most U.S. cities face prolonged vacancies because of the surplus, excepting Washington, New York, San Francisco, Boston and parts of the Silicon Valley, where technology and venture capital spur leasing, he said.

“If you’re in the knowledge-based industries such as VC, everything ‘green’ and social media, there is a large, growing demand for space,” Rosen said.

The average vacancy rate in U.S. central business districts fell to 14.7 percent in the third quarter from 14.8 percent in the second quarter, Cushman & Wakefield Inc. said last month. The overall rate including suburban areas rose to 17.5 percent, the highest since 1993, from 17.4 percent, according to the New York-based broker.

Prices for U.S. commercial property rose in September after falling to an eight-year low the previous month, Moody’s Investors Service said yesterday. Demand for the best office buildings in major markets pushed up the Moody’s/REAL Commercial Property Price Index 0.3 percent from a year earlier as investors sought returns higher than fixed income. Prices gained 4.3 percent from August.

Rise in CMBS

The issuance of commercial mortgage backed securities is likely to increase to $25 billion next year and $60 billion by 2013, driven by investors in highly rated portions who demand more conservative underwriting and protection, Rosen said. CMBS peaked at $234 billion in 2007 before the credit bubble burst and sales plunged 95 percent the following year, according to data compiled by Bloomberg.

Demographic trends, the high cost of new construction and record home foreclosures make companies that own apartments good investments, according to Rosen. Senior housing is a “sweet spot,” as are multifamily properties in cities with workers aged 20 to 34, he said.

Interest rates on 10-year Treasury notes will rise to as high as 5.5 percent in two to three years, so real estate investors with good credit and long-term tenants should take advantage of current low rates, Rosen said.

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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