Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California in Los Angeles. He estimates that 15% of all office space across the U.S. is currently vacant. "We can live with 10% to 12%, but we start really feeling it at 15% to 18%," he says. "And we could get [to 18%]."
One metric for commercial mortgage underwriting is the "break-even" ratio, which is (Debt Service + Operating Expenses)/(Potential Gross Income). The most aggressive commercial loans have break-even ratios in the neighborhood of 85 percent. Thus when vacancies rise past 15 percent, some office buildings will have insufficient cash flow to cover their expenses and debt service. And in an environment where rents are falling, a 15 percent vacancy rate is worse than it looks.
Office vacancies in Manhattan are now around 13 percent--and Manhattan has about 25 percent of all Central Business District office space in the country--at least according to Cushman and Wakefield. Hang on to your hats.