The outlook for office development, which quickly deteriorated in late 2008, will continue to worsen through early 2010. Improvements, however, are expected later in 2010, although the sector will still remain depressed.
The de-leveraging in financial markets that began last September deepened the recession in the overall economy, adding large layoffs in office-based financial industries, and removed credit access for speculative developers. Office rents are declining while vacancy rates are rising in every major office market except Washington, D.C.
The large New York City and Washington, D.C., office markets had well below average vacancy rates in the third quarter of 2008. The Washington, D.C., market will remain relatively strong but a surge in financial industry layoffs will quickly weaken the New York City market. The markets with the highest vacancy rates include Dallas (overbuilt), Riverside, Calif., (at the center of the busted housing market), the New Jersey suburbs outside New York City, and the depressed manufacturing centers of Detroit and Cleveland.
BD+C reports that the value of office project starts dropped abruptly late in 2008. The value of private office starts fell below $1.0 billion/month in November for the first time in more than five years. Similarly, the value of government office starts in November was about one-third the peak monthly values of last summer.
As always, recession and recovery reach the office market later than other commercial markets. The latest construction spending report (October) puts office construction activity 9% above a year ago and still rising. A steady decline is expected through 2009 with activity not returning to the current level for at least two years. The decline in project starts will be steeper than the decline in job site spending, and the decline in predevelopment work will be steeper than the decline in starts. The AIA member survey suggests that the decline began in October.
|Highest vacancy rates|
|Source: Property & Portfolio Research
The Washington, D.C., market will remain relatively strong but a surge in financial industry layoffs will quickly weaken the New York City market.
|North Jersey 20.3%|
|Riverside, Calif. 19.5%|
|Lowest vacancy rates|
|New York City 12.0%|
|Washington, D.C. 12.4%|
|Las Vegas 12.7%|