Office subsector king of commercial market

December 01, 2000 |

Within the commercial construction market, growth in the office subsector continues to reign supreme. Through the first eight months of 2000, total spending for new construction and office renovation work was running at 12.3 percent ahead of the same period in 1999.

Office building construction expanded at strong double-digit annual rates during four of the past five years. Growth was 23 percent (in current dollar terms) during both 1997 and 1998, so the 10.3-percent gain last year represented a bit of a slowdown. But after a very weak final quarter of 1999-and a slow start during the first two months of this year-the office construction market has regained its footing. Over-the-year-growth from March through August was in the solid 12-percent to 16-percent range.

To this point, the market has been able to absorb all of the new space that has come on line. According to the commercial brokerage and real estate information firm of CB Richard Ellis, the national office vacancy rate stood at an incredibly low 7.9 percent during the second quarter of 2000. This year's second-quarter office space availability rate was 0.7 percent lower than during the first three months of 2000, and 1.7 percent below the second quarter of 1999.

Although it's true that office building construction in certain geographic areas has finally crept ahead of demand, in other areas there is almost no space available for prospective tenants. The office vacancy rate for the San Francisco metropolitan area stood at a very low 4.8 percent during the second quarter of 1999. By the second quarter of this year, however, the area's supply of available office space slid to an almost unfathomable 0.7 percent. Vacancies in the nearby San Jose metropolitan area dropped similarly, from 4.5 percent last year to 0.7 percent in the April-June period of 2000.

It's likely that the economic fundamentals considered to be most conducive to the construction of still more new office space won't be nearly as favorable in 2001 as during the past several years. The consensus opinion is that overall U.S. economic growth will slow, resulting in smaller job gains in the office-intensive financial and service sectors of the economy.

Consequently, following office construction spending growth of about 9 percent this year-assuming some moderation in spending trends during the final third of 2000-the market should slow to a gain of about 5 percent during 2001 before beginning to accelerate moderately again during 2002 as the U.S. economy regains its momentum. Vacancy rates should slowly begin to rise moving through next year and are expected to be in the 10-percent range by the final months of 2001.

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