Office recovery ready for takeoff

Office construction spending growth has barely kept ahead of materials and labor inflation since office construction stopped declining two years ago. Several short bursts of spending have proven to be false signals of recovery since each was followed by a period of declining spending.

January 2005's office construction spending was slightly less than in eight of the last 12 months. This is consistent with reports from real estate analysts that office vacancy rates have declined only marginally and that office space absorption and rental rate trends are not yet clearly positive in many markets.

Nonetheless, a 9.5% increase in office construction spending is expected in 2005, followed by 20% more expansion in 2006, and continued above-average growth in 2007. Historically, this is a modest turnabout in this extremely cyclical market.

Ultimately, though, spending over the full course of this building cycle could be higher than the forecast, given the huge gain experienced at the same point in the last building cycle, which saw office construction spending more than double from 1995 to 2000. At the same time, the office market recovery could be delayed one or two quarters because the amount of available office space embedded in already leased existing space (look around your office) is unknown.

 

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