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CRE Finance World, Autumn 2012

A Recovering Office Market May Not Move the CMBS Office Credit Needle Chart 2 The economy is not generating enough jobs to reduce vacancy Jobs Added/Lost and the Office Delinquency Rate rates or boost rents significantly. Rents are still 15% below their peak 2008 levels. We expect rent growth to be very gradual, and any gains resulting from the historically low completion levels will probably come first from increased occupancy. As occupancies edge higher, steadier rent growth should follow. Chart 3 Office Supply, Absorption, and Vacancy Rate Source: Bureau of Labor Statistics © Standard & Poor’s 2012 After 11 consecutive quarters of vacancy rates exceeding 16%, the rate declined by 30 basis points to 15.7% in the second quarter, according to CBRE (see chart 3). However, the CBRE vacancy rate includes sublet space but not “shadow space” (space that a tenant leases but is not using or marketing for sublease), which © Standard & Poor’s 2012Source: CBRE may significantly understate true vacancies. Even if hiring picks up, the vacancy rate may remain elevated because tenants holding Over the longer term, demographic shifts could reduce demand shadow space can meet their own growing needs within their for office space. Younger workers, who have learned to work existing space. CBRE estimates that the office vacancy rate won’t anywhere that can accommodate a laptop, may not long for a fall below 15% for about another year. corner office the way Baby Boomers did. Corporations have been “restacking,” or making offices more efficient, by changing the Completions in 2011 totaled 9.05 million square feet, the lowest floor layout, reducing paper file storage space, and introducing annual amount since 1994. In the first half of 2012, 3.44 million smaller, more uniform workstations. CBRE currently puts the square feet of office space was completed, which trails first-half amount of square footage per office worker at 221 square feet. 2011 levels. At their most recent peak in 2008, completions According to CoreNet Global, an association of corporate real totaled 78.5 million square feet, or about 11 times the annualized estate and workplace professionals, office space per worker will 2012 midyear level. We believe the low completion levels may be continue to decline. According to the survey, the average office due to the pullback in construction lending amid concerns about space per worker will be 151 square feet in 2017. high vacancy rates and the strength of the U.S. economic recovery. CRE Finance World Autumn 2012 18


CRE Finance World, Autumn 2012
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