It's Not Just the Economy

The Grubb & Ellis report states that, "There may not be an office market recovery worthy of the name until 2011." It explains that the timing of a recovery in the office market depends on two related events: how quickly the economy begins to grow again and how quickly the labor market begins to add jobs.

The report raises the prospect of a so-called jobless recovery, a period in which GDP growth turns positive but the unemployment rate remains flat or even continues to rise. Such jobless recoveries "followed the last two recessions, when the economy was growing but not fast enough to encourage employers to hire," it points out.

Grubb & Ellis cites Manhattan, Long Island and the New York Outer Boroughs as the only three major US markets to post vacancy rates bewlow 10% in the first quarter, although Manhattan's vacancy rate, like the US average, has risen for five consecutive quarters. Eight markets posted vacancy rates above 20%, led by Phoenix, where vacancy is approaching 25%.

The CBRE and Grubb & Ellis studies differ somewhat in their particulars but describe the same general trends in the US office vacancy rate. CBRE says that the rate rose to 14.7%, an increase of 70 basis points, at the end of the first quarter, while Grubb & Ellis pegs the national rate at 15.6%, up 80 basis points since last year's fourth quarter and 260 basis points since vacancy bottomed at 13% in the fourth quarter of 2007.

CBRE, offering some additonal perspective, notes that the national office vacancy rate is still well below the high of 19.1% set in 1991. CBRE's report is from CBRE Econometric Advisors, formerly known as CBRE Torto Wheaton Research, which is an independently operated unit of CB Richard Ellis Group Inc.

One reason that office vacancy news only recently started to match some of the other economic news in terms of its downward trends, Grubb & Ellis points out, is that commercial real estate is a lagging indicator--it doesn't reflect the changes in the economy until after they occur. Commercial real estate, "is catching up with the rest of the economy, unfortunately, as office market fundamentals deteriorated sharply in the first quarter," the report observes.

Several markets that were supposed to hold up well did not, according to Grubb & Ellis. These included Los Angeles (negative 2.5 million square feet of absorption), Houston (negative 929,000 square feet), Seattle (negative 740,000 square feet ) and Washington, D.C. (negative 723,000 square feet). "The recession has left few markets untouched, though a handful of markets, led by Dallas-Fort Worth, did eke out positive absorption," the report states.

The office market, of course, has plenty of company in its downturn, the CBRE report points out. Vacancy rates across the US office, industrial, retail and multifamily markets are continuing to increase as the recession ripples throughout the commercial real estate markets.owners.