Office occupancy down, rents go up

Article in the WSJ notes that downtown office building occupancy is (obviously) down, but rent prices are still going up. This would seem to be backwards from how the market is supposed to work, right?

As it turns out there’s a reason for this. So many of the office building are leveraged, and if they start reducing their rents, the collateral underlying their loans becomes less valuable, and they either have to pony up more or possibly even surrender the building to the lender. Heh.

So to avoid this, they are giving new tenants rent reductions by another name (several other names, actually). Like “free rent for a year” on a 10 year lease. Expensive buildouts paid for by the owner rather than the lessee. Others could include free signage or other perks which, in an earlier life, would have cost.

Higher asking prices are a reflection of the seemingly oddball way the [commercial real-estate market] works. Rents are a critical metric used by lenders and others to determine the value of a property. Owners will do everything they can to avoid cutting them, even if it means keeping space vacant because the rental prices deter prospective tenants.
Landlords who cut rents significantly to fill empty space “would significantly reduce the appraised values of their buildings,” said David Bitner, the head of global research for [Newmark Group], a commercial real estate services firm. “This in turn could lead to a covenant default on their loans or at minimum would make it harder for them to refinance.”
Office rents are expected eventually to tumble, probably after owners and lenders are forced to restructure mortgages or sell distressed properties.

So eventually, someday, ever, maybe, possibly, when all other options are exhausted and when competitors have capitulated first, rents may come down. Until then, sorry sucka.