Shadow Office Space, Density & Jobs

by CoyDavidson on March 1, 2011

The Challenges of a Recovering Office Market

There has been quite a bit of discussion lately regarding the challenges the office market faces despite an improving economy. These include:

  • The impact of shadow office space
  • The trend toward denser office layouts and collaborative workspaces
  • The impact of technology and alternative work strategies

Corporate profits have rebounded strongly yet unemployment levels remain elevated.

There is no question that these are all significant factors, yet the biggest reason improvement in office market fundamentals has been so sluggish centers primarily around the fact,  that it has been in essence a jobless economic recovery. Despite the fact corporate profits have rebounded, most employers have been reluctant to hire in a big way.

Corporate Profits (Billion $, SAAR)

Source: Colliers International

From the peak of almost 138 million payroll jobs when the recession started, the U.S. economy has lost 7.7 million jobs through January.

The recession was not only long (18 months) but also deep in comparison to the recession of 1981-1982 (16 months) as the economy continues to struggle in job creation.

Non-Farm Payroll Creation from Onset of Recession (Months)

Source: Colliers International

The good news is that office using employment is trending upward, and there is a historically low volume of new office space under construction. As a result, we are seeing positive absorption in most markets and on an aggregate level nationally. Over the last year, we have absorbed some volume of the undefined shadow office vacancy, all though exactly how much remains is anybody’s guess.

US Office Market: Absorption | New Supply | Vacancy Rates

Million S.F. | Percentage

What About Small Business?

The pace of transition from a tenants market to a situation that is more favorable for Landlords will vary to some degree among various markets, and while a trend of more efficient office layouts among corporate occupiers will have some impact, it is really more about when they begin adding jobs.

Also, often lost in the discussion is the impact of small businesses whose balance sheets are not generally as healthy as Corporate America, and when they are optimistic enough to begin to hiring again. There is a lot of suburban office space that will need to be filled up with 2,000 to 5,000 square foot tenants.

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