No Slowdown for Office Demand

The flow of young talent into the job market continues to be a boon to the office leasing business.  This is especially true for owners who have elected to buy in vibrant urban areas and markets near major universities and the talent pool that comes with them.  Live/work/play environments are still in heavy demand, and they have grown to include many rapidly growing secondary markets like Raleigh, Austin, Nashville, Salt Lake City and Portland, Oregon.  Look for further growth in secondary markets with strong infrastructure and a wide range of amenities as employers are looking for vibrant work environments with available housing in the market for their employees.

Flexible office space seems to show no signs of stopping, especially for the tech industry. JLL reports that flex space inventory has grown at an annual rate of 23 percent since 2010. In 2018, flexible space made up more than two-thirds of the country’s office market occupancy gains. JLL predicts that it will account for a third of the market by 2030 compared to less than 5 percent currently.

The success for landlords will hinge largely on their ability to adapt to new demands from employers in terms of technology, creativity and adaptability.

Of course, the word “recession” is being bandied around, and the unpredictability of downturns means they are always a risk, but commercial real estate is likely to be impacted according to the degree of a downturn’s severity, or by an event that could damage the performance of our specific tenants. If a downturn is light or if it affects just one industry, there may not be too much disruption in office leasing. Since the last recession ended in 2009, 33 of 36 quarters have seen positive economic growth according to the MIT Center for Real Estate. This year, the U.S. is entering its 10th year of expansion.  This does not mean putting things in cruise control.   The success for landlords will hinge largely on their ability to adapt to new demands from employers in terms of technology, creativity and adaptability.

So far in 2019, monthly job growth has been strong. According to the Bureau of Labor Statistics, employers added a solid 263,000 new jobs to the U.S. economy in April — surpassing many forecasts.  The average job growth over the last three months is about 169,000. According to an article by VOX, the number could be higher and suggests there is actually a labor shortage making it hard for employers to fill all the open positions. The Commercial Real Estate Development Association (NAIOP) reports that asking rents also continue to rise. Commercial Property Executive predicts “Overall, U.S. real estate values are projected to hold steady in 2019, with prices maintaining and transaction volume poised to outpace previous years.”  If the economy does dip into recession, these metrics could turn quickly, so landlords who have adapted to secular changes will be better positioned to weather any cyclical corrections.

 

For the time being, all of these indicators point to the potential for continued stability and growth in key national office markets.

 

Chuck Schreiber is the CEO of KBS, one of the largest office owners in the U.S. with over $11.6 billion in assets under management.