How will Health Care Reform Impact Recovery in the Office Market?

by CoyDavidson on March 28, 2010

There has been much written and discussed among commercial real estate types and economists over the past six months on the recovery of the national office market. There are varied opinions depending on who you listen to as to when the recovery will begin and the velocity of the recovery. The one principle everyone agrees on is that the stabilization and recovery of the national office market is dependent on one factor; the growth of office employment. The bottom line is office leasing fundamentals will improve when companies start hiring.

Starting in the 4th quarter of last year and through the 1st quarter of 2010 we began to see most office markets around the country to begin to show signs of stabilization as leasing activity picked up, rents began to stabilize and increasing vacancy rates leveled off, to put it in simple terms “the bleeding stopped.” There was robust growth in the U.S economy of 5.6% during the 4th quarter of 2009 and while that didn’t necessarily equate to employment growth and absorption of office space, companies began to get more comfortable in the premise that we were in economic recovery. As a result, the prospect of hiring again, as well as the idea of making significant real estate facility decisions once again appeared on their radar screen.  Payroll and real estate are two of the most expensive line items for most companies and there is a tendency to delay those type of decisions when there is uncertainty looking forward.

The Wildcard

There has been one major wild-card out there in Health Care reform

Last week the Democrats dragged Health Care reform across the finish line and President Obama signed the bill into law. Over the past week major companies such as ATT, Verizon, Monsanto, 3M, John Deere and Catepillar made announcements the new bill would result in the recording losses of hundreds of millions in dollars in tax benefits for their companies.

As corporate America and small business begin to sort out the impact of health care reform, we can be relatively sure of three things:

  1. In the short term, this increased tax liability will have a negative impact on the bottom line for most corporations.
  2. It creates uncertainty as to what it is going to cost to provide health benefits to an employee.
  3. More than likely in the long run, it is going to cost more for a company to provide health benefits.

The Timing is All Wrong

This post is in no way intended to be a political statement. Most people who know me do not have any difficulty figuring out which side of the aisle I tend to sit. I for one desire a better health care system, but my real point is no matter what your position is on health care reform, the timing of this bill could not have come at a worse time. We are just emerging from the worst recession since the great depression and have just recently begun to see signs of recovery and increasing demand for goods and services. What the country needs right now is job growth and I find it virtually impossible to visualize any scenario whereby health care reform is going to compliment job growth in the short term.

Back to the Office Market

This week brings the end of the first quarter and over the next few weeks we will begin to see the report card on the office market’s first quarter performance as well as host of other economic data. I suspect the office market for the first quarter or 2010 will not show any significant improvement over the fourth quarter of 2009, in Houston or most markets around the country.

There has been some optimism that significant job growth would return by the latter of half of 2010, fueling recovery in office markets around the country. My fear is that health care reform makes that at the very least a 2011 scenario and more likely even a 2012 proposition.

The good news for companies is while health care reform may negatively impact your bottom line and the prospect of hiring new employees may not be on the immediate horizon, as a result the office market will remain a tenant’s market providing the opportunity to secure attractive office leasing terms and minimize occupancy costs. The bottom line is it is a good time to be negotiating for office space.

In today’s challenging economy the initiative to minimize occupancy costs and maximize corporate real estate performance could not be timelier. Contact me to discuss how we can help you achieve those objectives.

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