The Expert: Real Meaning of ‘Recovery’

Grubb & Ellis Co.’s first-quarter office market statistics are ready in draft form, and the preliminary snapshot appears about as expected: not encouraging but not bad enough to set any new records.The vacancy rate ended the quarter at 15.5 percent, an increase of 70 basis points from the year-end rate of 14.8 percent. Net absorption plunged to negative 17 million square feet, on par with some of the worst quarters during the 2001 recession. The inventory of available sublease space ended the quarter at 110 million square feet, a gain of 10 million square feet since the beginning of the year but still well below the record of 146 million square feet set in 2002.Rental rates are behaving erratically; the average asking rental rate of $28.12 for space available on the market at the end of the quarter was 2 percent higher than the year-end rate, but the effective rental rate on deals actually signed in the first quarter, which includes discounts and concessions offered to tenants, fell 1.5 percent from the prior quarter.Though counterintuitive, it is not uncommon for asking rates to increase in the early stages of a softening cycle because the construction pipeline continues to deliver Class A space for several quarters after the market has begun to deteriorate, and much of it is being delivered empty. The asking rates for this top-of-the-line available space are driving up the average, but because landlords will do deals at lower rates—sometimes much lower—effective rates are falling. At some point landlords will compete by discounting their asking rates.The timing of a recovery in the office market depends on two related factors: how quickly the economy begins to grow again and how quickly the labor market begins to add jobs. While some analysts expect gross domestic product growth to turn positive in the fourth quarter, most expect the unemployment rate to continue rising until mid-2010 or later. This could turn out to be a jobless recovery of the kind that followed the past two recessions, when the economy grew but not fast enough to encourage employers to hire. There may not be an office market “recovery” worthy of the name until 2011.Bob Bach is senior vice president & chief economist for Grubb and Ellis Co.