Report Offers Caution on Recovery

The new report, by economist Arthur Jones, notes the positive news of recent days and weeks, including the stock market's rally, the apparent bottoming-out of the housing market, the clearing of inventories by businesses and rising consumer confidence. Despite the increasingly positive data, however, the report observes that "It may be time for a reality check."

Despite these glimmers of hope, the economy has posted no economic growth yet and the employment picture, which is directly linked the office market, remains doubtful. The Torto Wheaton report points out that the latest figures show that the economy lost 345,000 jobs for the month, which is about half the average monthly decline for the previous six months. It describes the job market numbers as "a marked and somewhat surprising improvement and it gives us hope that a bottom is indeed in sight." However, as the report states, these numbers still represent "a very poor performance."

The analysis by Jones underscores a theme that a number of economists have been sounding ever since the recession began: Job growth is a big driver of the office market, and without job growth, the office market will struggle to recover, even if the economy begins to turn around. Economists some time ago coined the term "jobless recovery" to describe this phenomenon, and they have been wondering if the US economy will undergo such a jobless recovery, in which the creation of new jobs lags behind recovery in other sectors of the economy.

On the positive side, the Torto Wheaton report observes that although businesses are still cutting jobs, employers will eventually start adding to payrolls again but if the current trend continues. On the other hand, the report cautions that "sometimes a little good (or in this case less bad) news can go a long way and sometimes be taken too far." It reminds us that real estate analysts and investors are no different from anyone else in their reaction to this "less bad" news. "Lately, I have been hearing whispers that there are signs of improvement in the office market; I have yet to see any data or hear a persuasive argument to support this line of thinking," Jones' analysis states. To the contrary, it says, there are a number of very good reasons to believe that a recovery in the office market will indeed lag the economy. Although the worst of the recession may be over in terms of job losses, it could be that "We are now entering the worst phase of the real estate correction."

The Torto Wheaton research compares office-using employment for the last three recessions, including 2008-2009, finding that since the 2001 recession, the rate of growth for office-using employment has been comparatively slow. The comparison shows that, among other things, a lengthy recovery means that demand for office space will be slow to pick up. "It also means that this economic recovery is not likely to spawn a boom in either job growth or commercial real estate demand," the report states.

Even when hiring resumes, it will be a slow process. "With a slow recovery in the offing and space to spare, employers will see little need to accumulate space to accommodate additional workers—at least not until the space they already have is filled," the report concludes. Although the picture this paints "is not necessarily a pretty one," the report advises, "It is one that is important to consider before get carried away by the 'good news' we see on the economy.