A Discussion Of Why The Office Market Might Not Turn Around Until 2004 (or later)
Prepared by: Jeffrey S. Weil, MCR.h,
CCIM, SIOR
Senior Vice President
Colliers International
1850 Mt. Diablo Blvd., Suite 200
Walnut Creek, CA 94596
Ph. 925.279.5590 Fax. 925.279.0450
jweil@colliersparrish.com
www.officetimes.com www.colliersparrish.com
There is currently an estimated 65 million square feet of vacant office and research & development space throughout the Greater Bay Area. In addition, there are several office projects currently under construction due to the lengthy lead times involved in new office construction.
The daily business section continues to report additional corporate layoffs and corporate earnings are considered 'good news' if losses do not exceed expectations. Profits for most corporations are either non-existent or far below levels of 24 months ago.
There is usually a significant lag time involved in the corporate decision-making process when it comes to placing excess office space on the market. A downtime in earnings might be followed 6-12 months later by announcements of downsizing and then an additional 6-12 months might go by before the excess real estate is actually placed on the market. It is anticipated that the reverse timetable may also be true: Corporate profits take an upturn, earnings continue to increase, but the lag effect delays significant new hiring until the company is bursting at the seams. We are still heading down towards the bottom of the earnings, employment and office market 'trough.' Excess space placed on the marketplace still exceeds office space absorbed. Rental rates in most sub-markets are either still headed lower or are trying to stabilize at rental rates not seen since 1985.
It may be that the bottom of the office market is realized in 2002 or perhaps 2003. Due to the aforementioned lag periods, dramatic new hiring and the resulting office vacancy decrease/rental rate increase might not be evident in many sub-markets until 2003/2004 or perhaps beyond. There are also other relevant factors which may impact the office market recovery. Several of the Asian financial powerhouses such as Japan are experiencing difficult economic times. There are countries on the verge of financial collapse such as Argentina. The economic fallout from September 11, believed to be well in excess of $50 billion dollars may cause a future negative impact in our economy and this figure is still rising. The long-term additional costs in security and travel may also weigh on future economic recovery. It may take a number of consistent quarters of positive economic news before Wall Street, the venture capital world, and the man or woman on the street truly believe we have completed the economic downturn cycle. At this point they may not be as exuberant in their investments as was demonstrated in the financially reckless days of 1998-2000. Lastly, real estate cycles typically last much longer than we would like, and why should this one be any different?
Questions or comments? Please e-mail jweil@colliersparrish.com