U.S. Office Sector Growth Flattens in the First Quarter
By Jason W. Tolliver, J.D., Vice President
According to a recent report released by Cassidy Turley Chief Economist Kevin Thorpe, growth in the U.S. office sector flattened in the first quarter of 2013 as businesses continue to push for space efficiency. The U.S. office market absorbed just 4.5 MSF of office space during the first three months of the year, a decrease from the 23 MSF absorbed in the previous quarter. In fact, demand figures for the first quarter were the weakest since the recovery began in 2010. Not surprisingly vacancy rose by 10 bps in the quarter to 15.4%.
So what happened? Shadow space, tenant downsizing, fiscal policy uncertainty and the continued trend of space efficient utilization are stealing momentum. Nevertheless, there is subtle improvement going on behind the scenes. Shadow space – office space that has been leased but not utilized – is slowly filling up and rents have generally held steady for five straight quarters. Moreover, the amount of vacant sublease space is also eroding, down 65% from its recessionary peak.
The credit markets also appear to have reached an important inflection point in the cycle, which bodes well for U.S. sales activity going forward. CMBS issuance totaled $22.9 billion in the first quarter of 2013. That is double the loan volume generated at any other point in the current recovery. Other lending metrics, such as the Federal Reserve Senior Loan Office Opinion Survey, show that the net percentage of banks reporting “stronger demand” for CRE loans reached an all-time high in the fourth quarter of 2012. Given the clear signs that credit conditions are loosening, along with investors’ increased appetite to take on additional risk, investment sales are poised to accelerate in 2013.
Space utilization is another trend worth watching. According to a survey conducted by CoreNet Global, the amount of office space per worker has declined from 225 SF prior to the recession to 176 SF in 2012. Other studies suggest that although certain industries (such as law firms and tech firms) are dropping their space requirements by 20-30%, most other tenants are not altering their space requirements as dramatically.
Looking forward the greatest impediment to growth in the office sector is U.S. fiscal policy. A “grand bargain” needs to be reached on deficit reduction by this summer or sequestration cuts are likely here to stay through 2013. Assuming a deal can be hammered out in the coming months, and barring no unforeseen setbacks, the office sector should continue to make slow but steady progress in 2013. Unfortunately, those are two big “ifs.”
Jason serves as the Vice President of Research in the Indianapolis office of Cassidy Turley. He has authored numerous market studies on topics affecting the economy, capital markets, finance, leasing, property and project management, and the factors that affect supply-demand fundamentals in commercial real estate.