Office buildings - is it really this bad?

The New York Times has a gloomy piece today on the cycle of layoffs to subleases to vacancies to building owners not being able to pay the mortgages, thus leading to a potential "ticking time bomb." According to the story,

Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.

By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.

Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.

I would think a lot of it is lease dependent. Are there termination options? Are bankruptcies playing a role as tenants reject leases? I was always under the impression that, generally speaking, things were not overbuilt, although I was concerned about so much space in Chicago coming on line. Even some tenants are backing out of commitments at new buildings here. Frankly, I never thought I would see New York vacancies approach 10%.

And the fact that many buildings are in CMBS pools makes it all the harder to do workouts. It makes me want to look at one of my deal toys: a bottle of Pepto-Bismol with a plaque that says, "Remind Me Again Why We're Doing a Conduit Loan Elixir."

All in all, this is a great time to be a tenant, the best in a while. And some say this is the perfect time to buy, especially if there is any government help. The trick will be to wait and see whether any stimulus will create jobs and the need for offices. One interesting thing is the speculation that President-Elect Obama wants to create 600,000 new government jobs. If that is the case, there will be a lot of need for government leases and the guaranteed, AAA-rated cash that come with them. Smart landlords may want to start gearing up now. GSA leasing is very tricky.