The Problem with the Office Market

by CoyDavidson on August 26, 2010

Those of us that make our living leasing office space whether on the Landlord or Tenant side of the equation understand the return to health for the national office market is all about jobs.  In spite of some pretty lackluster economic news over the last couple of weeks in the employment sector, the optimism that the recession has faded is fairly widespread among real estate types. While some characterize the commercial real estate industry as “smoking hopium” a case can be made that suggests the office market has bottomed out.

Companies are flush with cash but not hiring

Prior to the financial meltdown that struck in 2008 many companies coming off several years of strong performance were flush with cash and as the Great Recession played out, began to put a premium on liquidity as the credit markets collapsed. The preferred strategy was to build balance sheets that could withstand any financial shock. This meant putting off investment and hiring as they shifted to a defensive position. Fast forward to 2010 where generally speaking corporate earnings have been respectable and the recession was declared to be officially over. Today Corporate America is sitting on a ton of cash and according to the Federal Reserve, nonfinancial companies held $1.8 trillion in cash and other short-term assets at the end of March — up 26% from a year ago, the largest increase since the Fed began keeping records in 1952. Cash now accounts for 7% of company assets, the highest level in nearly 50 years.

As we begin to approach the end of the third quarter there is a growing disconnect between corporate earnings and employment data. Robert Pozen of Harvard Business School and former president of Fidelity Investment summarizes; “Because of high unemployment, management is using its leverage to get more hours out of workers, and what is worrisome is that American business has gotten used to being a lot leaner, and it could take a while before they start hiring again.”

Uncertainty is the issue

The single biggest impediment to job creation is uncertainty. Today, companies are simply reluctant to hire as they wait for a clearer vision as to what the future holds. In addition to worries of a “double dip” recession, there are other concerns that remain for both Corporate America and small business.

  • The 2011 Tax System
  • The impact of Healthcare Reform on labor costs is a mystery; and
  • New financial regulations create a new set of questions

Historically the office market lags real economic growth by 2-3 quarters and until we begin to see both significant and sustained job creation, the office market will remain anemic. Furthermore, until some of the uncertainty can be removed, Corporate America is not going to begin hiring new employees in a big way. Fortunately this most recent real estate downturn was more demand driven than a result of oversupply, so perhaps the road back will not be as long as previous instances. I would suggest we are at least on the road to recovery in the office market, even if we are just parked on the side of that road.  When companies feel more comfortable they have a handle on the economic environment going forward and healthy job creation begins, we will begin to accelerate to posted speeds. However, that doesn’t seem likely even under the most optimistic scenario until the second half of 2011.

In the meantime all the corporations sitting atop a large pile of cash continue to have an opportunity to capitalize on market conditions in the office market, whether it’s locking into attractive long term lease deals or looking at the merits of owning their headquarters.

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