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Office vacancies, already high, are actually much worse because of untold "shadow" space -- space that's leased but empty.

July 24, 2010 – Comments (8)

Story from Minneapolis. This situation is hardly isolated to Minnesota.

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Shadow space haunts office market

Office vacancies, already high, are actually much worse because of untold "shadow" space -- space that's leased but empty.
By JENNIFER BJORHUS, Star Tribune
Last update: July 21, 2010 - 9:21 PM
http://www.startribune.com/business/98980004.html?elr=KArks:DCiU1OiP:DiiUiD3aPc:_Yyc:aUU

[excerpt]

That section of empty cubicles, the conference rooms collecting cast-off office furniture ... for employees, they're dreary reminders of layoffs, consolidations and shelved expansion plans.

To real estate professionals, it's "shadow" office space -- space that's leased or owned but largely empty and not officially listed anywhere as vacant. And brokers are fretting about the buildup of unprecedented amounts of it around the Twin Cities. All that idle square footage will likely prolong the recovery of the area's hard-hit office sector, already struggling with high vacancy rates. Slow demand for new space will likely mean a dearth of new construction, and all the jobs and building material sales that go with it.

NorthMarq's semiannual Compass Report, due out today, shows that the direct office vacancy rate in the Twin Cities has hit 19.9 percent -- a 19-year high, by NorthMarq's numbers. Fold in the space tenants are trying to sublease, and the rate jumps to 22.8 percent -- the highest since NorthMarq began tracking sublease space in 1995.

The rates would be even higher if what the report describes as a "significant" amount of uncounted shadow space weighing on the market was counted.

The trouble is, while employees can clearly see the mothballed spaces, no one knows how much of it there is.

"We can't quantify the shadow space," said John McCarthy, senior vice president of brokerage services at NorthMarq. "That's what's so lurking and mysterious about it."