Sunday, July 19, 2009

Office Space: Negative Absorption and New Construction

by Calculated Risk on 7/19/2009 03:10:00 PM

From the Sacramento Business Journal: Office vacancies piling up (ht Brad)

Office vacancies in Sacramento continue to rise as new buildings come online while many businesses are retrenching or closing altogether.

During the second quarter, local office vacancy surged to [a record] 20.9 percent ...

Brokers say these lowlights reflect the clash between today’s economic uncertainty and the confidence of the past, as large new buildings planned years ago are being completed just as companies hit by the recession are hunkering down, getting leaner or closing down.

While conditions would appear dreary even without new construction, the completion of major office projects is compounding the problem.

“You’ve got very significant new buildings being added to the base,” said Cornish & Carey managing partner John Frisch ...
Companies are "hunkering down, getting leaner or closing down" and giving up office (negative absorption) just as long planned new space comes online. This is pushing up vacancy rates, and pushing down rents. The article mentions suburban Class B office lease rates are back to levels last seen in the 1980s.

I posted the following nationwide graph a few months ago based on CoStar's The State of the Commercial Real Estate Industry: 2008 Review/2009 Outlook (no link). This shows that 2009 will be the peak office space delivery year for this cycle.

Office Space Delivered per Year Click on graph for larger image in new window.

This graph graph shows the amount of office space delivered per year in the U.S. in millions of square feet since 1958. The over investment during the '80s (S&L crisis) is obvious, as is the office boom during the stock bubble.

The red columns are based on projections from Costar for projects already in the pipeline. Although deliveries will be strong in 2009 (with all the projects currently under construction), CoStar projects new office deliveries in 2010 will the lowest since 1996, and deliveries in 2011 will be the lowest in over 50 years.