There’s demand for US office space–if you know where to look

John Greenman

Letter from Denver

This is the second in a series of catchup blog entries in which I share links to pieces that have come across my screen since last February on US commercial real estate and that I’ve been wanting to share with TransEconomics clients and other La Carpeta Negra readers.

In Office Employment Growth Has Not Translated into Robust Leasing and Rent Growth: Here’s Why, the authors are pointing to an issue that keeps coming up: the seemingly lackluster performance of the office market despite a continuing steady recovery and positive headlines about how much tech firms and their millennial employees are growing.

There is no question that overall demand for office space has been muted compared with previous cycles despite many years of steady if low economic growth. This is because of both the (probably permanent) shrinkage of financial services users that has been only partly offset by higher space requirements by the tech sector, and the reduction in occupied space per employee, which has been dramatic due to more efficient “open space” (i.e. lots of cubicles) floor plans and fewer private offices.

An overall national office vacancy rate of about 16% seems high for this point in the recovery, but it should be noted that much of this vacancy is now in older buildings of the 1980s vintage that have become functionally obsolete.

Many of the more dynamic regional markets have seen new construction of properties in both downtown and suburban locations those efficient design, range of tenant amenities, and access to mass transit render them attractive to users despite higher nominal rents.

The users typically are able to reduce square feet per employee sufficiently to “break even” compared with their previous total rental payments.