Expect Slow, Steady Job Growth

White-collar employment growth through the first six months of 2005 can be described as disappointing and volatile at best. While January and March job gains were unimpressive, both under 124,000, February posted a high of 300,000 job gains. While April exceeded expectations, posting employment increases of 274,000, disappointment set it again in May but increased again in June to 166,000. Despite this volatility, the unemployment rate stands currently at 5%, the lowest rate recorded since September 2001.

While job growth during the first quarter fell short of expectations, the commercial real estate market still benefited from the limited growth. First-quarter leasing activity pushed 2005 into high gear, setting lofty expectations for the quarter to follow. Overall leasing activity totaled 57.9 million sf through March, 3.3 million sf more than the previous year. In CBDs alone, leasing activity increased to 25.6 million sf from 19 million feet the year prior. While these gains were promising, the threat of job loss remained.

The commercial real estate market retained that momentum in the second quarter. Leasing activity was recorded at 121.5 million sf, up substantially from 2Q of '04. CBD year-to-date leasing activity accounted for 40.2 million feet of this space, a 3.8% increase over 2004.

Strengthening market momentum was further illustrated by vacancy-rate declines and increasing rents. The overall national CBD vacancy rate was down more than 100 basis points from second-quarter 2004. The second quarter's 13.7% is also the lowest rate seen since Q1 2002. Average asking rents increased from $24.73 in second-quarter '04 to $25.17 currently, due to healthy leasing activity. The slow but steady job growth in the first half of the year encouraged optimism among firms to expand, increasing demand and giving building owners more command over pricing.

CBD construction deliveries are expected only to double by year-end to 4.1 million sf , considerably lower than last year's 9.2 million. However, space under construction currently amounts to 40.2 million sf in both CBD and non-CBD environments, higher than the second quarter of last year. As a result of this year's increased construction--combined with a lag in demand for 2003-2004 deliveries--vacancy rates will likely rise in the short term, by the end of 2005, and then fall over the remainder of 2006.

On average, the balance of 2005 should see 205,000 office-using jobs created per month. The professional and business-service industries have experienced the largest job gains, followed by financial services firms. Such growth bodes well for the commercial real estate market. This cycle has begun with slow and steady improvement and is not one that will produce a dramatic turnaround based on today's fundamentals.

Think Tank member Maria Sicola is senior managing director of research services for Cushman & Wakefield in New York City. Views expressed here are the author's solely.