Kincaid told the journal in a conference call that he expects rents to fall 15 percent to 20 percent on expiring leases in 2005, which is a bigger decline than the 12.6 percent rent rolldown the company experienced in the third quarter.
Kincaid said tenant improvement and leasing commission costs remained high in 2004. These costs averaged $22.66 a foot in the third quarter, which is down slightly from $22.85 a year ago. He expects these costs to fall even more — to between $18 and $20 a foot — in 2005.
Still, Kincaid said he's "seeing some very significant signs of improvement" in the office markets and the economy in general. Industry-wide, he said, vacancies have declined for four consecutive quarters in the company's top 20 markets, and some of the company's largest tenants have indicated they're hiring again. Also, GDP growth is forecast at 2.5 percent to 4 percent, he noted. All of this is "encouraging," he said.
Kincaid said the vacancy rates seem to have peaked in 17 of his company's top 20 markets. (Chicago and Boston are the key markets that have yet to peak.)
Although there are signs of a recovery, Kincaid said it has not yet translated into more leasing activity and higher rents. He said the average vacancy rate is 15.7 percent, and "our experience would suggest you'd have to be at 14 percent or under" before the office market sees a significant rebound.
Kincaid's comments came during a conference call discussing the company's third-quarter results.
The Chicago real estate investment trust, which is the largest owner of office properties in the country, reported revenue of $790.7 million in the third quarter, up from $778.1 million a year ago. It posted a loss of $120.3 million, or 32 cents a share, compared with net income of $110.2 million, or 28 cents a share, a year earlier.
The loss in the latest quarter was largely due to a one-time, non-cash impairment charge of $229.2 million, or 51 cents a share, related to the writedown of research and development properties the company is selling in California. An impairment charge occurs when the valuation at which properties are held in a portfolio exceeds the amount the company expects to fetch when it sells them. In this case, the value of the properties had declined significantly since Equity Office purchased them from Spieker Properties in July 2001.
The company's funds from operations totaled 11 cents a share in the latest quarter, which is down from 70 cents a year ago, and short of analysts' mean estimate of 13 cents a share, according to Thomson First Call.
The shortfall was related to falling rents and lower-than-expected operating income in the quarter.
