State

Housing crisis also means more empty offices

A staggering number of Stanislaus County office buildings are sitting empty, and they're likely to stay that way for a while because the ranks of office workers have shrunk.

That was the bleak message presented at this week's Valley Real Estate & Economic Conference in Modesto.

About 12.5 percent of offices are vacant in the county, and it's tough to find tenants to fill that 674,600 square feet of bare space, said Brian Velthoen, president of Velthoen Associates Commercial Brokers.

In 2005, by comparison, the vacancy rate was about 5 percent.

"We've had a job loss of about 2,500 office workers in the county since 2006," Velthoen calculated, using state Employment Development Department statistics.

Fewer workers mean diminished demand for office space.

The residential housing market crash can be blamed for most of those losses, Velthoen said.

Offices that once were filled with mortgage brokers, title insurance officers, real estate agents, developers, engineers, architects and planners have gone out of business or reduced their staffs.

"About 500,000 square feet of empty office space can be attributed to the job losses in real estate," Velthoen said.

Those office spaces won't be filled until jobs are created. He said Stanislaus' employment growth projection is about 420 jobs per year, so it would take an estimated six years to replace those lost jobs.

That's a long time for buildings to be empty.

Property owners are lowering lease rates to attract new tenants and keep current ones.

Offices that rented for $1.85 to $2 per square foot per month in 2005 now are going for $1.10 to $1.50, Velthoen said.

Not only are rental rates falling, but the value of office buildings has plummeted, said Paul Draper, who runs Centerra Capital, a Modesto-based real estate investment management company.

Between 2007 and 2009, Draper estimated the market value of a typical 10,000-square-foot office building declined 36.4 percent. That's because vacancy rates doubled and base rental prices dropped 22 percent.

"The biggest risk right now is tenant credit. We don't know if they're going to be around in the future," said Draper, who urged property managers to monitor their tenants' financial stability.

Draper also advised property owners to focus on reducing operating expenses, such as utilities, insurance and taxes.

For investors who carefully analyze the depressed market, Draper said this may be a good time to buy office buildings.

"If you understand the dangers," Draper said, "you can take advantage of the opportunity."

Bee staff writer J.N. Sbranti can be reached at jsbranti@modbee.com or 578-2196.

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