There has been quite a bit of commentary over the last year and very recently regarding the impact shadow office space will have on the market, the leased but empty office space no longer being utilized by companies as a result of the economic downturn. Some organizations have even taken a stab at estimating how much of this space exists across the country.
Commercial real estate is a data intensive discipline and after 20 years in this industry, I have seen a lot of economic statistics as property values, sales prices, cap rates, rental rates, vacancy rates and absorption statistics are widely tracked and analyzed by commercial real companies and data service providers. I recognize that data can be manipulated and interpreted in many ways and the, “garbage in | garbage out” principle can apply, but in most cases I don’t question the accuracy of widely reported data.
My first required statistical analysis class in college I ended up having to take twice, and the second time I was really paying attention. So, since shadow vacancy is data that has not been historically tracked in commercial real estate, the first time I saw an actual shadow vacancy rate reported it raised a red flag. I had to question its accuracy without understanding the methodology used to arrive at the estimated figure. I actually asked the company who reported this data more than once what methodology they utilized only to get no response, but I guess we are just supposed to take their word for it.
So how could you arrive at such a figure?
- You could survey every office tenant in every major market, and well we know this didn’t happen.
- You could survey a cross section of office tenants around the country that would result in somewhat representative sample for formal statistical analysis.
- You could develop some formula based on tenancy profiles, occupancy rates and reported employment statistics.
Surveying a large cross section of tenants large, medium and small from a wide variety of markets and industries around the country to produce a relevant sample for statistical analysis would be the proper approach. Consider me highly skeptical this approach was taken either and even if it was, a very small percentage of companies actually track this data in detail. I would then have to question the quality of the data.
I can only assume that some type of formula was used to arrive at this estimate. Looking at the reported numbers the only data that I could use for comparison purposes was to take a look at my clients exposure in terms of shadow vacancy. This sample is a wide cross section in terms of company size and industry but primarily concentrated in the Houston market area and skewed by the size of one large user in a particular industry. I actually have only one client with notable shadow vacancy and while we had discussions regarding disposition of the space, they opted to inventory the space as they expected to need in a relatively short time frame. So in comparison, as a percentage my client portfolio of aggregate shadow vacancy is vastly different than the estimates reported.
Shadow Vacancy Exists and its going to Impact the Market
Yes, shadow office space vacancy does exist and there is no doubt as the economy recovers and office using employment growth accelerates that companies with shadow office space are going to have a notable impact on the velocity of net office space absorption and the timing of a shift in market fundamentals toward the Landlord side of the equation. I don’t question the concept, I am just skeptical there is enough reliable data to accurately predict the volume of shadow office space, who has it, and who has already disposed of it. Somebody’s estimate or prediction of its impact on the market is going to turn out relatively accurate, but then again I might pick the Super Bowl winner as well if I take a stab at it. Last week I would have picked the Patriots, always subject to change!