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2011 Office Market Forecast

2010 was a year in which businesses regained the capacity to make decisions and act decisively.
After spending 2009 contemplating existential disaster, they awakened to the realization that they were still in business, often quite profitable, and could no longer remain in suspended animation.
So they began to make decisions.
Their first decision, in most cases, was: no increased spending.
As a result, 2010 will be remembered as the year of running in place – lots of transactions, often quite large, but with no growth component; a year for lease renegotiation, consolidation, space compression, and cost reduction.
And until job growth returns, you can expect more of the same. 

 

If there is one iron law of the commercial office market, it is that demand follows job growth.
And the correlation between jobs and demand for space is surprisingly direct and immediate.
A brief lesson in recent history: in 2008, we gained over 100,000 jobs and had 2.7MSF of positive absorption; in 2009, we lost about the same number of jobs we’d gained the year before and had 2.7MSF of negative absorption; in 2010, we gained fewer than 10,000 jobs and had 0.5MSF of negative absorption.
Now, the relationship between job growth and demand is rarely as direct as the last three years would suggest, but it’s always there.
So where do we go from here?

 

Most projections suggest 20,000 – 40,000 new jobs in 2011, so we should seethe return of positive demand for office space as the year progresses.
What will slow it down, however, is the presence of “shadow space” (space leased but vacant or soon to be vacant).
Since this space is still under lease, it does not show up in the vacancy figures.
And we have a bunch of it, especially in the CBD: Continental, Shell, and Chevron by themselves represent as much as 1 .5MSF of shadow space; and this will constitute a significant drag on the market in the coming year.
In the suburbs, many energy service and engineering companies have reduced their payrolls significantly over the last two years without reducing their facilities footprints; so they’ll have to hire a lot of people before they need another square foot of office space.

 

We expect to see a modest recovery in the office market by the latter part of the year, although demand should remain somewhat anemic.
One of the important reasons for this sluggish demand, in addition to shadow space, is the continuing push for increased efficiency in the use of office space.
Record profits and liquidity have done nothing to reduce corporate focus on the control of variable expenses, and this is having noticeable consequences in the office market.
Constant downward pressure on office and cubicle sizes, in conjunction with technological developments that have allowed great increases in alternative officing schemes, have had and will continue to have a major impact on demand for space.
If we used space the way we used it in the 1980’s, we would have construction cranes on every corner.

 

In general, 2011 should look somewhat like the year just passed as tenants reorganize and move around, but rarely expand.
Older buildings will become tenant donors for newer, higher quality product; and some buildings and submarkets – especially the western submarkets – will enjoy tighter conditions and could see higher effective rental rates.
But for most of the market, lease rates are unlikely to rise.
A strong international economic recovery would obviously accelerate the Houston office market recovery (primarily by increasing the demand for energy, thus promoting hiring in our critical energy sector); but a downturn of the magnitude we have recently endured – job loss in 2008 was the worst since the dark years of the 1980’s Oil Bust – means it will take time to recover fully.
So you’ll have to keep the cork in the champagne bottle a little longer….but it wouldn’t be amiss to pop the top on a couple of cold ones.

CCCIM Gulf Coast chapter – 2011 Forecast Competition

by Sanford Criner
Executive Vice President – Corporate Services  – CB Richard Ellis

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