Office demand nosedives in shadow of terrorism

March 01, 2002 |

After growing rapidly during the last five years, demand for new office space in U.S. metropolitan areas has waned. Employment declines moved from the manufacturing sector throughout the rest of the U.S. economy during the second half of 2001, and were spurred on by the events of Sept. 11. Fewer people working for financial institutions, consultants and insurance and securities brokers means less demand for new office buildings and less need or incentive to renovate Class B and C existing space.

The value of new office work completed through November of 2001 was running a scant 0.5 percent below the total for the first 11 months of 2000. But this understates the current difficulty facing developers or managers of office space. Despite the appearance of relative stability in the market, demand conditions were deteriorating severely throughout the second half of 2001 as job losses spread from the industrial sector to the service sectors.

Vacancies on the rise

Year-end 2001 office market statistics recently compiled by commercial brokerage firm Oncor International, Washington, D.C., reflect this swift and steep decline. Downtown office vacancy rates averaged 12.6 percent during December 2001, up from 10.4 percent the year before. During the 12-month period, vacancies increased in 75 percent of all markets surveyed.

Vacancy rates for suburban office buildings increased even more sharply: from 9.3 percent in December 2000 to 14 percent in December 2001. The number of such markets reporting more than 15 percent of inventory in vacant space leapt from 6 percent during December 2000 to 30 percent in December 2001.

Layoffs and rising office vacancy rates have greatly reduced demand for new space. The decline for 2001 as a whole versus 2000 will be relatively small, but the year-to-year trend will continue to grow weaker at least through the middle of this year. However, if the economic recovery materializes as expected, construction spending in the office sector is expected to grow at a high single-digit rate in 2003.

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