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Thursday, January 15, 2009

Office Vacancy Rate Rises in Q4

by Calculated Risk on 1/15/2009 06:42:00 PM

The vacancy rate for U.S. office buildings rose in the fourth quarter of 2008 to 14.5% real estate research firm Reis said today (no link).

According to the LA Times, Grubb & Ellis reported the national office vacancy rate rose to 14.8%: Realty group predicts some 30% cuts in L.A. office rents

Nationwide, the office vacancy rate increased to 14.8% in the fourth quarter from 13% a year earlier. That's the highest rate since the third quarter of 2005, when it was 15.1%, Grubb & Ellis said.
The following graphs show office vacancy rate (from REIS) vs. unemployment (hat tip Will).

Office Vacancy vs. Unemployment Click on graph for larger image in new window.

The first graph shows the office vacancy rate vs. the quarterly unemployment rate and recessions.

Changes in the unemployment rate and the office vacancy rate are highly correlated. As the unemployment rate continues to rise over the next year or more, we'd expect the office vacancy rate to rise too. And this will discourage investment in new office structures - and put significant pressure on office rents and prices.

From the LA Times story:
Los Angeles office landlords will probably be forced to slash rents as much as 30% in the first half of the year as job cuts create more empty space, Grubb & Ellis Co. said Wednesday.

Office vacancy rates in Los Angeles County jumped to 12.2% at the end of 2008 from 9.7% a year earlier, the Santa Ana broker said.
Office Vacancy vs. Unemployment The second graph shows the relationship between the office vacancy rate and the unemployment rate using data starting in Q1 1991. The unemployment rate is from the BLS and the office vacancy rate is from REIS.

I've added the polynomial trend line (with R^2 of 0.88). The three most recent quarters are marked in red.

This suggests that office vacancy rates are currently below the expected level, and vacancy rates might increase sharply over the next year. However, given the limited amount of data (since Q1 1991), the lower than expected vacancy rate might also indicate there was less overbuilding in recent years as compared to the early '90s.