The slow down in the global economy has led to huge vacant office spaces. According to reports, empty offices in New York City, Chicago and Los Angeles have already exceeded 10%. And Mumbai, too, is following a similar path. “It’s the same story here, and it has to do with the global meltdown,’’ said a CEO of a leading city-based real estate company, who did not wish to be identified. Real estate observers say that the city’s premier commercial business district of Nariman Point has been witnessing a growing number of empty offices. It is learnt that for the first time in several years, there is space available in grade one buildings in Nariman Point. In fact, the business hub has seen vacancy levels in grade one buildings rise to 11%, said sources tracking the rental market. Till recently, the vacancy level was barely 2% in this area.

According to a report by the US-based Urban Land Institute and PricewaterhouseCoopers, commercial real estate in America faces its worst year since the “wrenching 1991-1992 industry depression’’. The report predicted 15-20% losses in real estate values, from the mid-2007 peak, and quoted real estate industry experts expecting financial and real estate markets in the US to bottom in 2009, and then flounder for much of 2010. Since the last quarter of 2008, all the prime commercial business districts such as Nariman Point, Bandra-Kurla Complex and Parel have been affected. Corporates and MNCs are not renewing their lease agreements and are shifting out. But even as the demand slackens, at least 5 million square feet of office space is expected to hit the market this year in the mill land enclave of Lower Parel. Sources say that the vacancy levels, which are in the region of 5%, could increase in the coming months. In Parel, several corporates have renegotiated their lease agreements by hammering the price down by as much as 40% to 50%.

Kaustuv Roy, director Transaction Services of global property consultancy firm, Cushman & Wakefield, said vacancy levels have been inching upwards largely due to a change in corporates’ business strategies as visible in the last six to nine months. The firm’s research shows a 6.4% overall vacancy in Mumbai. “Many corporates are relocating from high cost to lower cost locations, thus ensuring locations such as Worli seeing a marginal increase in the vacancy levels. The demand side has been very slow and cautious. This has slowed down the rate of absorption of office space over the last year,’’ he said.

Mumbai received almost 9.5 million square feet of office space, leading into an excess supply situation in certain locations. Kaustav said this trend will continue in the first few months of 2009 as a large supply of 16 million sq ft is expected, most of which is due in the first six months. Knight Frank India chairman Pranay Vakil said that up to 80% of the office market is driven by the IT-ITES industry, which has now considerably slowed down. “It is no surprise that vacancy levels will go up in this segment as most of the stock was created in anticipation of the demand. In Parel, for instance, offices are getting created but the demand is not there,’’ he said.

In the US, the New York Times reported that in Chicago, demand has dried up just as office towers are nearing completion. Vacancies are also rising in Houston and Dallas, which had been “shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses,’’ said the NYT report. Anuj Puri, chairman and country head of Jones Lang Laselle Megraj, said the only connection between these cities is the meltdown of financial markets. “It is not just about New York and Mumbai. This is a worldwide phenomena. Some of the office space in all major cities will be freed by big investment banks, which have disappeared. Nothing will dramatically change in 09, from what we have seen in the last quarter of 08,’’ he said.

Commercial lease rental market has seen rents dropping on an average of 20% to 25% and going up to 50% in certain locations like the erstwhile mill land enclave in central Mumbai Lease rentals in Nariman Point are currently hovering around Rs 375-Rs 400 per square feet a month in premium buildings compared to Rs 475-Rs 500 per square feet a month nine months ago. Rentals in grade C buildings hardly command Rs 250 per square feet. In Parel, office space which was being leased out at the rate of Rs 300 to Rs 350 per square feet a month four months ago, is now down to Rs 150-Rs 200 per square feet a month. In the BKC, too, there has been a drop from an average of Rs 400 per square feet six to nine months ago to the current Rs 275-Rs 300 per square feet.