Office Market Outlook

Many people are keeping a close eye on the office real estate market given its strategic importance to many downtowns and suburban office centers. How can we expect this sector to perform over the next year? We turn to Global Insights and Grubb Ellis for some perspectives.

Global Insight does not expect new office construction to turn around until the second half of 2004. Although some local markets saw a slight improvement in demand over the last quarter, the overall office market remains in the doldrums. U.S. office vacancy rates edged up to 16.5% in second quarter from 16.3% in the first quarter¾the highest rate since the previous recession of the early 1990s. The rate at which office space is emptying has nearly doubled since 2001. With so much vacant areas and rents continuing to fall, demand for new office construction has been severely depressed. In May, seasonally adjusted new office spending registered an annual rate of just over $25 billion-- only half the rate of investment in early 2001.

With the sharp decline in the high-tech sector jobs and businesses, two of the hardest hit commercial real estate markets have been the San Francisco and San Jose metropolitan areas. But the continued softness in manufacturing activity, which has spread to many service industries, led to substantial office vacancies in some unsuspecting areas. In the second quarter, cities such as Columbus, Kansas City, Dallas, Atlanta, and Detroit posted vacancy rates above 20%.

According to Grubb Ellis, real estate market performance will vary considerably across U.S. metro areas over the next year. There will be lots of variation by sector (office, industrial and retail) as well. The Grubb Ellis regional forecast reports are a great source of data and insight. You can download them here.