Office Space Tanks – Part 2

New Workplace Strategies, Not the Only Reason – Last month, we explored several reasons contributing to reduced office space demand while job growth continues to expand nationally (LCS National Market Brief- April 2017). The trend to co-working spaces, Activity Based Workplaces (ABW), and a focus on portfolio efficiency, all contribute to this shift in office absorption. However, it appears that CRE portfolio alignment is the primary driver. REIS, a leader in providing real estate data to the commercial real estate market, studied why office absorption has been weak when metro-area office job numbers have outperformed other uses. In a recently published article on the Mortgage Bankers Association website, MBA Insights, REIS finds that the absorption rate per square foot per employee during the current economic recovery period is barely 40% of what has historically been reported. While the higher density and workplace trends are having some impact, it doesn’t explain the significant decrease in absorption during the current recovery (50 sf vs 125 sf). Bottom line: occupiers are still smarting from the last recession (2007-2009). The aftermath took several years to eliminate excess space in corporate real estate portfolios and the absorption per square foot per employee during the recovery supports the theory that rightsizing the portfolio may be the primary reason for the slowdown in office absorption. Add developer restraint during this last cycle and the national office market may have reached equilibrium. Good for stabilized occupancy cost and concessions.