NEW YORK CITY—Despite only modest new construction, CRE executives expecting the office market to rebound fully—and even soar above recession levels—are in for a disappointment. The sector likely will continue to recover at a sluggish pace due to an increase in office space efficiency, Cushman & Wakefield chief economist Ken McCarthy tells GlobeSt.com EXCLUSIVELY.
“There certainly was a lot of optimism at the beginning of the recovery that the lack of construction would lead to absorption and we’d get to a good vacancy rate,” he says. “But the drive to space efficiency has meant demand isn’t rising as fast as in the past, and that is holding up the vacancy rate.”
In fact, McCarthy says in his June real estate update, “the national vacancy rate is far above its 2008 level. Of course the pace of improvement will vary across metropolitan areas with some cities performing much better than others. But with every job absorbing less space than in the past, it will still take a long time for office markets to fully recover.”
More specifically, he adds in the report, “Stronger employment growth during the next two years should lead to faster declines in vacancy rates than the US has seen thus far in the recovery, but the declines are still likely to be slower than in past recoveries. In fact, by the end of 2015 the national vacancy rate is still likely to be higher than it was when the recession began, despite the fact that there will be more than a million more people employed in office-using industries than there are today.”
So what are building owners and tenants to do about this new normal?
Says McCarthy, “For owners, the increased efficiency means there will be more demand on building systems, like the restrooms, HVAC, elevators, etc. That’s a challenge. But landlords must become more tenant friendly.”
And for tenants, he says, “As businesses are getting better, there’s a greater interest by companies in changing their space. But there’s going to be more of a tendency to move versus renewing leases because it’s easier for occupiers to redesign a space that’s new for them.”