U.S. Office Market Forecast to Bottom in 2010

The U.S. office market vacancy rate is expected to hit 18.6% in 2010. That would be close to, but would not surpass the historic high of 19.3% set in 1990, according to analysis from CBRE Econometric Advisors. Vacancy is expected to moderate as demand increases in 2011.

"While there are signs of improvement in the economy, it is unlikely that the job market will bounce back in such a way that commercial real estate fundamentals will quickly turn around," said Arthur Jones, Senior Economist, CBRE Econometric Advisors in a statement. "The bottom may be coming into sight but there will be no quick return to glory days for the market."

Job loses generated by the downturn in the housing and financial markets are unlikely to quickly rebound and in the case of "Wall Street" some of the job loss is likely to be permanent, according to Jones.

A "jobless recovery" is likely to ensue as employers continue to focus on improving the efficiency of their current workforce. Combined with the demographic shift of declining labor force participation will mean less job growth when recovery does take hold. Jones' analysis indicates the current decade will be the first during the post-World War II era in which there is net job-loss in the U.S.

Some positive factors should aid the market recovery in 2011, according to Jones. The rate of office vacancy increases has been slowing. According to CBRE Econometrics Advisors the office vacancy rate increased, by 60 basis points 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 basis point increase in the second-quarter of 2009 and was the slowest pace of increase since the fourth quarter of 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."

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