A Long Road Back for the Office Market?

by CoyDavidson on September 21, 2010

The Recession is Officially Declared Over

The National Bureau of Economic Research, an independent group of economists, released a statement Monday saying economic data now clearly point to the economy turning higher last summer. That makes the 18-month recession that started in December 2007 the longest and deepest downturn for the U.S. economy since the Great Depression.

A jobless recovery does not bode well for the office market

Despite the end of the economic downturn, nonfarm payrolls are still down 329,000 from their level at the recession’s official end 15 months ago, and the slow growth in recent months means that the unemployed still have a long road ahead. The recession was not only long but also deep as only 9% of the jobs lost during the recession have come back.

Many economists estimate that output needs to grow over the long run by about 2.5 percent to keep the unemployment rate, now at 9.6 percent, constant. The economy grew at an annual rate of just 1.6 percent in the second quarter of this year, and many believe growth will not be much better in the third quarter.

A white paper released Monday from the Federal Reserve Bank of San Francisco, suggests strong U.S. productivity rates are likely to continue well into the future, creating another hurdle for significant improvement in the labor market.

A significant improvement to market fundamentals for the U.S. office sector is entirely dependent on a substantial and sustained upturn in office employment. The good news for office property owners is that once growth in office employment begins to sustain itself, these gains will not be offset by any increase in supply to the office inventory. There has been very little new office inventory come out of the ground since the downturn began back in December of 2007.

The bad news for office building owners is that substantial and sustained increase in office employment does not appear to be on the horizon as hope for a sharp recovery diminishes. Many forecasters are predicting 9 plus percent unemployment even through the next presidential election. Further complicating matters is corporations are reluctant to hire with so much uncertainty in the economy despite the fact they are recording strong profits and sitting on large piles of cash reserves. There is also a growing trend of companies increasingly looking for ways to do more with less in regards to their office space and facilities in order to remain competitive.

What about the Houston Office Market?

Despite some well documented issues exclusive of the National Economy, the Houston office market is in a better position for a quicker recovery to pre-recession market fundamentals than many major markets around the country. Propped up by the Energy Industry, Houston has only experienced approximately 1.4 million square feet of negative office space absorption since the beginning of 2009 when the market began to feel the downturn.

The impact of the recession has certainly made its mark on the Houston office market, but the damage just hasn’t been as severe as compared to other cities. So in effect Houston should have a shorter road back, but just like the rest of the country we are dependent on sustained growth in office employment before that full recovery can occur, and unlike other markets we do have some new office inventory coming online.

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