US Office Inches Toward Recovery

BOSTON-Office vacancy nationwide should begin to decline in the second half of next year, according to CBRE Econometric Advisors, based here. That gradual improvement as the market reaches its cyclical bottom is based on increasing tenant confidence in the economic recovery, although in some quarters there’s been nervousness recently about the renewed possibility of a double-dip recession.

“We don’t see that happening, but we certainly understand where the fears are coming from,” Arthur Jones, senior economist at Boston-based CBRE-EA, tells GlobeSt.com. “In terms of the economic recovery, we’re right about where we thought we’d be with the stimulus wearing off and the job market slowing just a little in the second quarter. But the office market is a little ahead of where we thought it would be at this point, and our feeling is that we’re probably two or three quarters away from a resumption of recovery and improving fundamentals.”

If a double dip were to occur, it would be most likely due to “a bottoming out of sentiment, particularly on the consumer side,” says Jones. “That’s what has us most worried right now, because once consumers pull back again, that’s two-thirds of the economy.” Yet he adds that the risk of a double-dip is still pretty low, probably about “one in five.”

The economic news lately has been mixed, especially the recent employment reports from the US Commerce Department. On the other hand, Jones says, businesses are seeing healthier balance sheets and are continuing to reinvest, as evidenced by a rise in technology-related purchases. “That’s really where we see the recovery going, and what’s going to drive this recovery.”

CBRE-EA projects that the office vacancy rate nationwide will peak in the fourth quarter of this year and stay at 17.0% through the first half of 2011, beginning a slow descent in the second half of the year. In the second quarter of 2010, office fundamentals showed both strength and weakness: demand was soft, but nonetheless Q2 brought the first positive net absorption in a year and a half as well as the smallest vacancy increase since the end of 2007.

While CBDs such as New York City, Boston and San Francisco appear to have an edge in the recovery, Jones points out that suburban vacancy rates fell in Q2, while vacancy in downtown markets rose by 10 basis points. “That had a lot to do with the construction in downtowns, where they had a lot of larger projects coming on line,” he says. “We knew this would be the case in some markets, whereas in the suburbs, the type of construction that goes on is very easy to clear out.”

Going forward, there’s relatively little new office construction in the pipeline, although CBRE-EA notes that there are also about two million fewer jobs than there were when the recession began. Even so, Jones predicts a gradual return of vacancy rates to equilibrium, to be followed by rents that start turning positive again in ‘11 after more than two years of declines.