by Bill McBride on 1/06/2015 01:47:00 PM
Tuesday, January 06, 2015
Yesterday I noted that Reis reported the office vacancy rate declined to 16.7% in Q4 from 16.8% in Q3.
A key question is when will new office investment increase significantly. Investment has been increasing - and adding to GDP - but investment is still very low. The following graph shows the office vacancy rate and office investment as a percent of GDP. Note: Office investment also includes improvements.
Here is Reis Senior Economist Ryan Severino's office forecast for 2015:
"2014 ended with lots of good news and optimistic data, for both the macroeconomy and the office market. GDP growth, labor market growth, net absorption, and vacancy are all trending in the right direction and at a faster pace over time. Barring some idiosyncratic shock, there is no reason to believe that these trends will not persist in 2015 while construction should remain in check due to relatively weak fundamentals in many markets, even as speculative development slowly returns to the market in stronger metro areas. Therefore, we are not only forecasting stronger rent growth for 2015 than 2014, but vacancy compression should slowly begin to accelerate and the potential exists for the market to outperform our expectations if the economy is even stronger than currently forecast. This is the most sanguine that we have been about the economy and the office market since before the recession."Click on graph for larger image.
This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual). Back in the early '80s, there was overbuilding in the office sector even as the vacancy rate was rising. This was due to the very loose lending that led to the S&L crisis.
In the '90s, office investment picked up as the vacancy rate fell. Following the bursting of the stock bubble, the vacancy rate increased sharply and office investment declined.
During the housing bubble, office investment started to increase even before the vacancy rate had fallen below 14%. This was due to loose lending - again. Investment essentially stopped following the financial crisis.
Even with the recent increases, office investment is below the levels of previous slow periods - and the vacancy rate is still very high. Like Reis, I expect the office vacancy rate to continue to decline, and for office investment to slowly recover.
Office vacancy data courtesy of Reis.