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IRVINE, CA-One of the big challenges facing the recovery in office market fundamentals is the weakness in the big time lessors: law and financial firms. Traditionally large users of office space, these sectors have been struggling to grow, greatly inhibiting office absorption in the aftermath of the recession. Financial services employment plunged nearly 9% peak to trough in the aftermath of the housing bust, market crash and recession. This left a huge swath of vacant space on the market as firms reduced their footprints, as well as an overhang of space to fill as firms utilize their existing space before resuming new absorption. In certain markets, namely New York City and San Francisco, this has been abated by a growing technology presence, but this remains isolated and helps only on the margins.

So far, the office market recovery has been held back by a lack of demand, as the supply pipeline shuttered following the recession and fundamentals remain near their trough and unsupportive of new construction. According to REIS, office vacancies remain elevated at 17% inhibiting rent growth, and the holy grail to getting growth in these fundamentals is absorption removing the remaining excess supply. As vacancies fall, rents will be able to grow more rapidly. This has been tough given the malaise in large office space using industries, resulting in a sector with fundamentals stagnant near their trough.

However, with the stock market roaring to new all-time highs, banks posting record profits and the initial recovery in the housing market, it appears financial firms are once again hiring. Financial services employment on a seasonally adjusted basis has increased in each of the last 21 months.  This has brought employment in the sector 3% off its lows, though it remains 5.8% off its prior cyclical peak. The trend is clearly positive however, and this sector is recovering.

Financial Services Employment Is on the Upswing

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While financial services employment remains well off its peak, and firms likely still have existing space in which to expand first, the renewed growth trend in this important office-using sector is encouraging. Continued gains in the sector will prompt firms to seek additional space, and could finally be the spark for office space demand the recovery has been sorely lacking.  Headwinds remain, most notably the myriad of regulation facing the financial sector. Should these diminish profitability or incentivize smaller institutions this trend could stall or reverse.  Additionally, the recent rise in interest rates and its still nebulous effect on the housing market could be a short-term headwind.  However, if the growth in financial services continues, the office market could finally get the demand its recovery has been waiting on.

Peter Muoio Ph. D. is a managing director at Auction.com and is head of the Auction.com Research Center team. He is a veteran of the real estate industry and founder of the research and consulting firm Maximus Advisors, which Auction.com acquired in December 2012. The views expressed in this column are the author's own.