I recently attended a Costar web conference that discussed the Nation’s economy and its affect on the U.S. Office Market and Austin Office Space Market for Q3-2011. Below are the highlights of the discussion:
OVERALL STATE OF U.S. ECONOMY
- 1. We are coming out of the deepest recession since the Great Depression and experiencing one of the slowest recoveries ever. Expect to take us until 2015 to come out of recession.
- 2. When we talk about the economy the most important thing about the economy is jobs because jobs drive demand for office space. Massive loss of jobs resulted in massive loss of office space absorption.
- It has not been the same recovery everywhere. Some markets were more resilient during the recession and/or have recovered faster than others (e.g. Austin, Texas).
- Previous recoveries were steep because of more manufacturing jobs. Now we have less manufacturing thus fewer/slower job gains.
- Consumers still sense weakness in the economy, their jobs, their home values, stock portfolios, etc…, however their actions speak differently as retail sales have increased thus increasing corporate profits. This is important because if corporations experience higher profits they typically reinvest (e.g. hiring new employees, office space expansion, etc..) .
- Technology and Energy markets showing stronger job growth and more office absorption.
- Vehicle sales and durable goods sales increasing which is one of the best leading indicators of how well an economy is doing. Consumers are buying cars however not buying as much as they did before.
- People are working harder to get financial situation in order. Household and financial debt is receding.
- Austin is the only market to show positive job growth (over 8%) since the recession.
- Overall – Positive growth but slow growth, however definite risks remain
U.S. OFFICE SPACE MARKET UPDATE
- Due to the decrease in rental rates across the U.S. Tenants are migrating to better office space (e.g. Class A)
- Tenants are utilizing their office space more efficiently than before. Not leasing as much for expansion needs.
- Tenants confident about the future of their businesses are taking advantage of and locking in today’s lease rates before they go back up.
- Small Tenant demand has been increasing and returning to market.
- Average SF leased per employee is currently 420 SF. This number increased from 390 prior to the recession. This is mainly due to the lower lease rates as a result of the recession.
- Leasing activity is increasing (driven by rent decreases) and at the highest level since the recession
- 80% of the largest office markets are seeing improvement in their occupancy rates.
- Vacancy rates decreasing year over year. Currently at 13.12% overall. Austin, Texas – 12.9%
- Some metros are still at risk from potential federal spending cutbacks which could affect office space markets. For example 40% of Washington’s GMP is government spending. Cutbacks in government spending can have a negative effect on office occupancy. The less exposure to government spending the less risk for markets. 20% of Austin’s GMP is government spending.
- Average Class A Rentals in U.S. – $27.50 SF. Down from $30.50 in 2008. Austin, Texas – $29 SF.
- Average Class B Rentals in U.S. – $20 SF. Austin, Texas – $$21.62 SF.
- Tenants upgrading to nicer space as they take advantage of lower lease rates
- Construction activity and new office inventory deliveries are at their lowest level ever. Boston, Houston, and Washington lead the % of new construction starts.
- Markets dominated by technology and energy are seeing more office absorption than others (e.g. Houston, Dallas)
- Different markets seeing different % of growth. Overall positive growth but slow growth
WHAT DOES THE FORECAST IN THE U.S. LOOK LIKE?
- Job Growth will continue slow growth
- We will continue to see positive office space absorption
- Office Occupancy rates will continue to increase to +/- 89%.
- Vacancy rates will continue to decrease to +/- 11% in the next 3-4 years.
- Construction activity is at its lowest level ever thus reducing half the risk of increased vacancy rates
- Rents will continue to increase through mid-2012.
- Rental Concessions will continue to decrease
- If you are leasing and feel confident about your business……..lease now and lease long
- If you currently lease Class B space and want to upgrade to better space………..do it now not later
If you would like to learn more about the state of the Austin Office Space market feel free to give us a call. 512-861-0525
