Some of the country's top office building owners reported that they're slashing rents and increasing tenant incentives to keep their buildings filled during one of the worst commercial real estate markets in decades.

Boston Properties Inc. (BXP), owner of the GM Building in Manhattan and other trophy properties, reported Tuesday, after the market closed, that gross rents declined 17% when comparing what new tenants are paying with the rent that had been paid by old tenants occupying that space. Boston Properties also reported that leasing in its total portfolio, which includes 146 properties, declined 2.4 percentage points to 92.1% compared with the end of 2008.

The results follow similar releases Monday by SL Green Realty Corp. (SLG), one of New York's largest office landlords, and Liberty Property Trust (LRY), of Malvern, Pa., which owns 700 properties including offices and light manufacturing. The two firms' funds from operations, a closely watched metric in the real estate industry, declined 28% and 10%, respectively, in the third quarter compared with the same period last year.

Company officials tried their best to be upbeat. "While competitive market occupancies continue to erode, we may be seeing the first signs of what will, with no doubt, be a slow market recovery," said Bill Hankowsky, Liberty's chief executive, in a written statement.

The office market is getting pounded by the economic downturn as businesses shed workers and put off leasing decisions as they wait for clearer signs of a recovery. In the third quarter, companies vacated 19.6 million square feet of space throughout the country, the equivalent of over six Empire State Buildings, according to Reis Inc.

So far the financial losses haven't been too severe. Boston Properties, for example, reported that its third-quarter revenue of $377.3 million was actually up from the same period in 2008, when its revenue was $357 million. Meanwhile, SL Green's revenue declined 7% to $249.6 million and Liberty's rose 2.7% to $187.5 million.

But bigger problems are heading their way. Office buildings often don't show financial strain in the early stages of a downturn because they're occupied by tenants who have signed long-term leases. As long as their tenants stay in business, they can actually see revenue increases because of escalation clauses in their contracts.

The pain starts hitting when the leases expire. In tough markets, landlords typically have to spend a lot to retain or attract new tenants through brokerage commissions with such incentives as free rent or interior construction. The growing cost of attracting tenants is a major factor that's cutting into funds from operations.

Also, because rents have declined sharply in most major markets, new leases carry lower face rents than the leases that are expiring. Nationwide, effective office rents fell 8.5% in the third quarter compared with the same period in 2008, according to Reis. Effective rents take into the account the cost of free rent and other tenant incentives.

SL Green during the third quarter beefed up tenant incentives, adding nearly an extra month of free rent to 6.9 months and offering new lease signers a construction allowance worth $56.19 per square foot, up $23 from the third quarter of 2008. The company said that average starting Manhattan rents were $47.31, down from $66.78 during the same period last year. Also, the company signed nine fewer leases in the New York during the third quarter compared with a year ago.

"We already knew rents were down is here is the proof," says Michael Knott, an analyst at Green Street Advisors.

While landlords are wringing their hands, the few tenants who are fortunate enough to be signing leases these days are getting great deals. For example, ECT Capital LLC, a unit of Fortis Bank Nederland, recently signed a lease for 20,000 square feet in a building owned by SL Green. John Lizzul, a commercial real estate broker at Newmark Knight Frank who represented ECT, said his client received six months free rent and $90 per square foot in tenant improvements, which will be used partly for terrace furniture.

SL Green CEO Marc Holliday said during an earnings call Tuesday that rents have dropped so steeply partly because there's a large inventory of high-quality sublease space available for leases over 10 years. He predicted that market conditions will improve once that sublease inventory is absorbed. He also said he expected a turnaround in the second half of 2010.

At the 4 p.m. EDT close of trading on the New York Stock Exchange, Liberty's and SL Green's shares were down 4.2% and 5.3%, respectively. Shares of both companies have risen sharply since March partly because they had fallen so far in the year before that. For example, SL Green's shares closed at $39.59, up 53% from the beginning of the year. But they're still well below their all-time high of $156.10 hit on Feb. 7, 2007.

Victor Calanog, director of research at Reis, said the drop in rents will likely spur a pickup in leasing activity over the next 12 months. Some large companies may cut rents and offer lucrative tenant incentives to fill space, but that could hurt their bottom line, he said. Calanog also noted that when job growth resumes, the vacancy rates won't start to drop until six to 12 months after that.

-By A.D. Pruitt, Dow Jones Newswires; 212-416-2197; angela.pruitt@dowjones.com