Office Bottom Could Arrive in 2010

As GlobeSt.com reported recently, for example, Jones Lang LaSalle foresees that commercial real estate recovery is likely to begin in the second half of 2010 with robust growth in the majority of sectors and markets during 2011. JLL says that the office market will continue to suffer through the first half of 2010 as vacant developments come online and sublease space again enters the arena. Vacancy is likely to bottom out at 20% in 2011, it forecasts.

CBRE Econometric Advisors offers a comparable outlook, although it differs in the details of vacancy rate. The US office market will hit its peak vacancy rate in 2010 nearing, but not surpassing the historic high of 19.3% set in 1990, according to the CBRE Econometric Advisors outlook. The difference in specific vacancy rates between the two forecasts is not unusual. Different brokerage and research firms typically track somewhat different inventories and vary in other respects in their research, so the specific numbers may vary even though the general conclusions are the same or nearly so.

Arthur Jones, senior economist with CBRE Econometric Advisors, comments that, although the bottom may be coming into sight, "There will be no quick return to glory days for the market." While there are signs of improvement in the economy, it is unlikely that the job market—the primary determinant of office space demand—will bounce back in such a way that commercial real estate fundamentals will quickly turn around, Jones says.

Jones notes that significant changes have occurred in the jobmarket, and that job losses generated by the downturn in the housing and financial markets are unlikely to quickly rebound. In the case of Wall Street employment, some of the job losses are likely to be permanent.

Jones mentions the jobless recovery that has been much talked about by economists, saying that the jobless comeback "is likely to ensue as employers continue to focus on improving the efficiency of their current work forces." Various factors will mean less job growth when recovery does take hold, according to Jones' analysis, which indicates this the current decade will be the first during the post-World War II era in which there is net job loss in the US.

Jones does state however, that some positive factors should aid the market recovery in 2011. The rate of office vacancy increases has been slowing. According to CBRE-EA, the office vacancy rate increased, by 60 basis points (bps), to 16.1%, at the end of the third quarter. Although this was the eighth consecutive quarter of rising vacancy rates, it was lower than the 80-bps increase in 2Q 2009 and was the slowest pace of increase since 4Q 2008.

Jones also notes that new construction was constrained leading up to the recession and developers have all but cleared supply pipelines in most markets. "Unlike past downturns in commercial real estate, today's rising vacancies are not driven by an oversupply of new office product but primarily by a lack of demand," he says.Some of the smaller, but expanding, markets in the US such as Austin, Raleigh, Boise, Idaho and Little Rock, Arkansas are also anticipated to maintain positive real estate fundamentals over the next 18 to 24 months as they benefit from low business costs, positive demographic trends and favorable industrial composition.