The Expert: Corporate America MIA

Clearly, the U.S. office market is in the midst of a terrible down market. Expansions are few and far between, and reducing excess capacity is the No. 1 priority for many businesses. As the economy unwinds, companies are faced with an oversupply of space that often ends up on the sublease market. (Year-end ’08 data certainly confirms this trend.) This surge in sublease space is occurring just as most businesses begin a hasty retreat, conserving cash and capital for what might be a prolonged and protracted downturn. The question many are asking is when will the pendulum swing back to growth and prosperity?Office buildings are just a factor of production, part of the enormous U.S. economy, which contracted in the latter half of 2008 and will almost certainly contract more in the first half of 2009. Even at this early juncture, the recession will quite likely be the longest since World War II. As the economy shrinks, so goes the demand for office space.The links between the economy, jobs and office market are well defined. Thus, to gauge future demand for office space requires a firm understanding of the economy. Policymakers are responding in ways unimaginable just a few short years ago, but to date the economy has not responded. The best estimate is that the down leg of this cycle will come during the third quarter of this year.Depending on stimulus measures, the economy could stage a fairly sharp bounce by year-end. Confidence, however, takes time to build, so it is unlikely that the economy will be sufficiently robust to produce job growth before well into 2010. Once corporate America hits growth mode, offices will still need to fill up before requiring expansion space.So, office markets will be heading backward for the next 18 months at a minimum. Even with little new development coming online in the next few years, vacancy rates will rise sharply, as much as 3 to 4 percent in many markets, taking vacancies back to 2002/2003 levels. This will be a painful period for many, but once the recovery takes hold, office investors can expect a number of years of relative calm—and no construction!