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CHICAGO-Nationally, the impact of the housing slowdown is likely to have a modest impact on the recovery of the office real estate sector, according to a study by Grubb & Ellis and Pittsburgh-based PNC Real Estate Finance. Yet, the impact will vary by market, and fast-growing Western and Southern markets, where housing prices and construction have expanded most rapidly, will feel the sharpest impact, the authors suggest.

"I think housing will manage a soft landing and not spill into the general economy and push it over the brink into recession as the technology slowdown did in the early years of this decade," Robert Bach, SVP of research and client services for locally based G&E, tells GlobeSt.com. Bach authored the 12-page study with PNC VP Elizabeth Ptacek.

Tenants related to the housing industry account for a smaller share of the office sector than tech-industry tenants do. In the tech-bubble year of 2000, tech tenants accounted for nearly a third of all office leasing activity, while the housing industry's share peaked at 11.6% in 2003, according to the study.

"Office property owners and investors should be aware of their exposure to housing-related tenants and adjust leasing plans accordingly," Bach says. Regions in which housing-industry tenants represent 15% or more of total office leasing activity, may feel the greatest pinch. The report ranks 10 cities that have had a housing-related office tenancy of from 15% to 35% between 2000 and mid-year 2006. Riverside, CA tops the list with a 35% proportion. The others, in ranking order, are: Des Moines; Orange County, CA; Las Vegas; Sacramento; Oakland/East Bay, CA; Phoenix; Seattle; Fresno; and Palm Beach, FL.

Currently, nationwide, the office market is experiencing a "classic recovery," he says, with strong absorption, modest construction, falling vacancies and rising rents. At the end of this year's second quarter, nationwide vacancy was 13.9%, down from 15.6% in the comparable quarter two years ago. Yet, on average, Bach notes that it remains above the generally accepted equilibrium rate of between 10% and 12%.

The tightest office markets, according to the report, are Bakersfield, CA; New York City; the Southern California markets of Riverside, San Bernadino and Orange County; the three major South Florida counties; Las Vegas; Colorado Springs; Washington, DC; and Honolulu. At the other end of the spectrum are Detroit, Dallas/Fort Worth and San Mateo, CA, each with an office vacancy rate above 20%. Year-to-date, tenant demand for office space has been strongest in Chicago, Dallas/Forth Worth and New York City, according to the report.

In a "worst-case scenario," patterned after the major housing downturn of 1991, the report says lost jobs in the housing sector could result in negative net absorption nationwide of up to 16 million sf of office space during the next four quarters. The more likely outcome, it projects, is that housing-related office tenants will vacate approximately eight million sf over those four quarters. That is equivalent to about 10% of total positive office absorption nationwide throughout the past four quarters ending this mid-year.

Instant Insights /

Housing Slump Puts Mild Dent in Office Sector

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