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CHICAGO-Now that the country has officially entered a recession and office markets have weakened nationwide, economists are wondering if the economic recovery—whenever it arrives—will mimic previous post-recession periods known as “jobless recoveries.” Such recoveries begin with a period in which economic conditions are improving but no now jobs are being created, generating little new demand for office space.

The jobless recovery lasted 14 months after the 1990-91 recession and 29 months after the 2001 recession, notes Robert Bach, senior vice president and chief economist for the Grubb & Ellis Co. Bach foresees that, “Most likely the current recession, already in its 12th month, will be followed by a jobless recovery that is likely to dampen tenant demand for commercial real estate over the next two years.”

Economists and industry analysts have been watching the connection between job growth and demand for office space since well before the market weakening began showing up in vacancy reports—and long before the recession was officially declared. A report earlier this year by Milwaukee-based Robert W. Baird & Co. noted that some markets would to lose more than others in the payroll cuts that the downturn has generated.

Washington, DC was one of the markets cited in the Baird report as less likely to suffer from job cuts than others. That outlook has been borne out by recent estimates from other sources. The financial crisis has generated estimates that the government is going to need between 500,000 square feet to one million square feet of additional space in the DC area to handle the crisis, which is expected to generate demand for office space from both new and existing government programs.

Bach points out that the term “jobless recovery” was first used to describe the period following the 1990-91 recession. “In earlier cycles, the labor market began to grow again simultaneously with or shortly after the end of the recession,” the Grubb & Ellis economist notes. Among the likely causes of jobless recoveries are productivity increases, off-shoring of jobs and a weaker manufacturing sector.

“The impact on commercial real estate is troubling,” Bach says. “Job growth is the most important leading indicator of office space absorption, and itsupports leasing activity for apartments, shopping centers and, to alesser extent, industrial properties.”

He expects that the recent acceleration in job losses, capped by the massive loss in November, indicates that leasing market fundamentals are poised to soften further. “It is very likely that job losses will continue through most of 2009, meaning that tenant demand for commercial real estate, which lags the labor market, may not firm up until 2010,” Bach concludes.

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