Numbers to know: Office market’s slow escape from doldrums

By Joe Salimando


Marcus & Millichap claims to be “the premier provider of investment real estate brokerage services.” This claim is accompanied by the statement, “The foundation of our investment sales is the depth of our local market knowledge.” The company also offers an informative blog.


Recently, Marcus & Millichap posted a report on “The Office Outlook.” It’s available free to those registered at the company’s website.


Bottom line: Electrical distributors may see a very slow rebound in new office building construction in the rest of this decade. With national office space vacancy rates seemingly stuck in the 16% range, tenant improvement work may well remain where it is as well.



Above: Chart from “The Office Outlook”


As goes the U.S. economy—as reflected by the stock market and the S&P 500—so goes office rents?


There are many trends and counter-trends in the office market. Rising rents do not necessarily mean more new construction. Then again, falling rents in one place do not mean that developers won’t build office buildings in another place. Many office-market observers have commented on the reduced allocation of “square footage per employee”—something that would seem likely to reduce new construction needs.


Marcus & Millichap offered its view of 2012, saying, “Development will remain limited. Four markets, Washington, D.C., Los Angeles, New York and Chicago, will comprise nearly 25 percent of the projected 22 million square feet of new supply in 2012. If employment projections prove out, net absorption could double to 47 million square feet, tightening the national vacancy rate to 16.6 percent by year end.”


The company’s report did not include a 16.6% national office vacancy rate that would widely be judged to be significantly below par.


Problem: Not enough new jobs



Above: Another noteworthy graphic from the Marcus & Millichap report


“Absorption,” as used in the real estate business, is about someone renting or buying empty space. “Net absorption” takes the amount of space available, plus built and subtracts from it the amount of empty space “absorbed” by new owners or renters who occupy the office space.


The above graphic’s blue bars seem to indicate a steady drain in the number of people U.S. businesses, institutions and governments pay to work inside of buildings.


Marcus & Millichap commented about prospects in the near term, saying, “Notwithstanding improvement in market fundamentals, the national vacancy rate may take longer to subdue partly due to protracted hiring practices and deferred expansion plans. Equivocation about significant policy changes to tax and financial regulations, healthcare reform, and the heightened risk of a European recession lowering U.S. exports and corporate profits may cause businesses to defer expansion and hiring decisions, particularly in an election year.”


Basic assumptions


All economic presentations begin with a macro overview, and Marcus & Millichap’s efforts do not differ. The section on how the nation’s economy is expected to perform in 2012 included the graphic below.



According to the company, “GDP is forecast to average 2.2 percent growth in 2012, while payrolls are forecast to expand by another 2.2 million jobs, reducing the unemployment rate to 8.2 percent. Employment growth may trend at subpar levels until GDP moves beyond its historical average of 2.5 percent.”

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