The US office was undoubtedly a recipient of hard knocks during the most recent recession. The 8.8 million jobs lost in that recession sent CBD US office vacancy rates soaring above 18% as companies cut back on space or exited buildings all together.
At a national level, the climb back from the depths of that precipitous market drop has been arguably slow and unevenly distributed (think San Francisco vs. traditional midwestern markets.) However, despite certain lagging markets, the overall tide appears to be turning, which has some investors eyeing the upside to be gained in new office investments.
The story behind “why now?” for office investment has both macro and micro underpinnings. We will address the macro story in this post and delve into the micro story in a follow-up post.
The office sector has generally lagged the broader commercial real estate recovery to date. Although signs are showing that the sector is improving, it is still early days in that rebound. Nationally, the U.S. office vacancy is hovering at about 13.7%, which is down only about 100 basis points since 2012, according to a mid-year report from Colliers International. The hangover associated with the elevated vacancies during the recession (which sent landlords scrambling to fill empty space with offers of free rent, free furniture and customized build outs) have resulted in scenarios where today many buildings are still operating with below-market rents.
That residual hangover now presents opportunities to boost both occupancies and rents going forward. Increased buyer demand is evident as U.S. office investment sales year-to-date through July reached $60.1 billion, up about 20% compared to the same period a year ago, according to data from research firm Real Capital Analytics.
Sustained job creation typically bodes well for the office sector. As of July, the primary office-using employment sectors had recovered about 122% of the jobs lost during the recession, according to Colliers. The forecast is for an average of 208,000 new jobs per month to be added with a total of 2.5 million new jobs added this year.
Another positive indicator for the office sector is that new construction remains in check, which should help sustain the steady absorption of vacant space that remains on the market. And rent growth is already beginning to accelerate in major metros across the country.
While overall office fundamentals look promising, it only tells half the story as we look to understanding office investment opportunities throughout the current cycle. In a follow up post, we will delve into the micro half of the story, which, in my opinion, sits at the core of the uneven recovery we have seen to date. The rising tide of the current office cycle will not necessarily lift all boats. Being properly positioned to leverage emerging trends in the office sector will separate winners from losers as the current cycle matures.