Economists' Commentary: Office Vacancies
By George Ratiu, Research Economist
Economic activity rebounded towards the end of 2009 at a faster than expected pace. The Bureau of Economic Analysis recently revised its fourth quarter 2009 estimate of gross domestic product (GDP) from 5.7 percent to 5.9 percent. All GDP components except government spending posted positive figures. Consumers maintained a cautious approach to spending, pushing personal consumption expenditures up 1.7 percent.
Optimism in the broader economic recovery was illustrated in the level of business investments. For the fourth quarter, investments jumped a significant 48.9 percent. The advance was underpinned by large expenditures on business equipment, software and transportation and related equipment. In particular, spending on computers and peripheral equipment shot up 91.2 percent. Transportation equipment investments also posted significant gains—up 65.9 percent from the third quarter. Business spending on commercial structures continued on a downward path, declining 13.9 percent in the fourth quarter, the sixth consecutive quarterly drop.
The rebound in economic activity has not translated into an improvement in employment. Except for a solitary 0.6 percent rise in November 2009, payroll employment has been declining for two years. Over this period, 8.4 million jobs have been cut, leading many job seekers into longer job searches, and causing others to discontinue their attempts altogether. The number of people receiving unemployment benefits has been hovering around the 4.5 million mark. The unemployment rate jumped from 5.0 percent in December 2007 to 10.0 percent in December 2009.
Employment in financial activities was down 1.9 percent, while employment in the real estate sector declined 2.1 percent at an annualized rate. Trade, transportation and utilities also recorded a 2.4 percent decline, and employment in service-providing industries dropped 0.7 percent in the fourth quarter. The silver lining—albeit a rather thin one—in the employment situation has been that the rate of employment cuts has been declining and there are modest signs of improvement for 2010.
January 2010 experienced upward changes in payroll employment. Professional and business services added 44,000 jobs in January, while trade, transportation and utilities gained 15,000 positions. In addition, education and health services added 16,000 jobs during the month and the federal government hired 33,000 employees.
In tandem with the trends in employment, demand for office space—though still negative—has steadily improved over 2009. For the fourth quarter 2009, absorption declined by 216,000 square feet. However, despite the upturn in the broader economy, tenants continue to be reserved in their decisions. Net absorption is expected to continue declining in the first quarter by 13.1 million square feet.
On the supply side, projects continue progressing through the pipeline, although the pace has been easing. The office sector closed 2009 with 52.8 million square feet of newly completed space. Given weak demand, the new space entering the market is placing pressure on existing space. With much of the new space being finished as class A, tenants are finding the combination of desirable properties and low prices to be good for their bottom line. The result is growing availability, particularly for older properties.
Vacancy rates have increased over the year, from 14.7 percent in the first quarter 2009 to a projected 16.3 percent in the fourth quarter. For the first quarter 2010, availability rates are expected to rise to 16.9 percent. Since landlords continue to offer generous concessions to secure tenants, effective rents are still declining. Rent dropped 12.7 percent in 2009 and is expected to 7.2 percent during 2010.
Regionally, office markets with resilient local economies and stronger office-using workforces posted lower vacancy rates. New York continues to top the list of metros with the lowest vacancy rate, with a first quarter figure of 8.4 percent. Following closely, Honolulu is estimated to see a 9.2 percent availability rate. Other markets with low vacancy rates include Stamford (10.9%), Long Island, NY (11.3%), Pittsburgh (11.5%), Boston (13.7%) and Washington, DC (14.1%). Office markets with weaker employment are finding availability rates much higher. These include Phoenix (26.4%), San Jose (25.7%), Detroit (24.6%), Tampa (24.0%), and Riverside (23.4%).
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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