If “uncertainty” was the buzzword for the 2012 office market, the catch phrase for 2013 is “just slightly better,” as a slower-than-usual economic recovery will keep office velocity at a crawl for everywhere except the energy and technology hub cities.
National office activity for all of 2012 was considered basically flat, as tiny gains in the fourth quarter, following the election, only offset the lackluster year. Economic and political turmoil overseas added to the uncertainty.
This year, for the most part, won’t be the outlet for the office demand pressure, according to experts from companies such as Jones Lang LaSalle and Cushman & Wakefield. However, the gains by the energy and tech markets show where the office market could be if jobs return in force.
“We’re seeing pretty high levels of office activity in cities such as Houston, Dallas, Denver, San Francisco and Fort Worth, Texas, and even secondary tech areas such as Boston and New York City,” says John Sikaitis, director of office research at JLL.
Sikaitis says the two industries were so active in 2012 that California and Texas alone accounted for 60.3 percent of the country’s total net absorption of 28.2 million sq. ft. Also, with most housing markets beginning to recover, the mortgage industry powerhouse cities in the South and Southwest will likely see gains, he says.
“Recovery could shift to markets favored by large populations, such as Atlanta, Phoenix, Orange County and south Florida,” Sikaitis says. “For the first time since the recession, we’re starting to see some growth in the housing sector companies.”
The national office vacancy rate hasn’t strayed much from the 17 percent mark in the past year, and the needle isn’t expected to budge much during the first six months of 2013 as companies continue to shrink real estate footprints to maximize efficiency.
“As we head into 2013, our optimism has increased a bit,” Sikaitis says. “The first half will be more challenging than the second half, as we’re seeing the big hurdle of more legislative debate on the fiscal cliff coming up in the end of February. If they come up with a resolution that works for the private sector, I think pent-up demand could start to appear by the second half.”
Cushman & Wakefield President and CEO Glenn Rufrano said during a recent webinar that the best catchphrase for 2013 may be “less uncertainty” as compared to last year. Rufrano, Head of Americas Research Maria Sicola, Senior Economist Ken McCarthy and other Cushman executives provided 2013 predictions during the Year-End U.S. Office Market Overview and Outlook.
This recovery has been the slowest on record, keeping the office market sluggish, McCarthy says. “From the second quarter of 2009 to the third quarter 2012, GDP increased only a total 7.5 percent. Other recoveries usually see double that improvement,” McCarthy says. “Uncertainty regarding how debt will be resolved in the United States and Europe slowed the recovery, and there are still debt issues on the table. The U.S. is adding about 144,000 jobs per month on average, which is okay, but not enough to significantly reduce unemployment.”
Only about 53 percent of the total jobs lost since the recession have been recovered, McCarthy says, but he agreed that a few regions are experiencing better growth than others. “If you’re a tech city or energy city, you’re now exceeding the peak,” he says.
Fortunately, construction is also modest, with only about 500,000 sq. ft. going up in the major CBDs, Sicola says. Rents have stayed flat and absorption has been positive. “Once we see employment growth, absorption should rise because of limited new construction in the pipeline,” she says.
New office supply is significantly down from the typical yearly average of 50 million sq. ft. Of the top 44 office markets, almost half have less than 100,000 sq. ft. in the construction pipeline. Large-block space is especially squeezed. “If momentum does pick up across the board, tenants will be confronted with limited quality space options,” says Sikaitis. There’s already tightness of large-block space in cities such as Chicago, Charlotte, Portland, Philadelphia and parts of Boston, where whispers of new speculative office towers to meet big-block needs already circulate.