Fewer Workers, Higher Commercial Vacancies

The demand and supply cycle of commercial real estate properties is not dependent on the national GDP, but it is directly proportional to the U.S. job market. “Absorption” is the key word in commercial real estate. Companies hire and fire based on corporate profits. In a free-market capitalistic system more workers are hired during good economic times, which means more office space is required (and absorbed). Conversely, employers issue pink slips when profits decline which creates a greater supply of commercial space.

In recent times, the commercial real estate industry peaked in 2007, which corresponded with the peak of corporate profits in 2006. At its lowest point in mid-2009, commercial property prices slid an average of 51% from their 2007 peak. In the last three months of 2010 this segment caught everyone off-guard by making a surprising and unexpected come back. In some areas, prices have rebound 33% and are off by about 18% from the peak.

Although prices are up in some markets, rents are sluggish and lag the rate of price increase in most U.S. commercial real estate markets. Experts are concerned about this lethal combination of low rents and high prices because of the threat of rising interest rates. It is unlikely that the interest will fall further. This means unless the rents catch up with rising prices, any small increase in the interest rate would take the air away from this short commercial rally.

The sudden rise in prices and the demand for commercial space is attributed to the massive spending and expansion of the federal government. This perhaps explains why commercial real estate prices have skyrocketed in metro areas such as Washington, D.C. and Manhattan, which are the biggest beneficiaries of the federal largesse. In most other areas of the country, prices continue to be sluggish and supply remains high, which reflects the levels of employment or lack thereof in the region.

While “jobless economic recovery” has become an overused buzz word at water cooler conversations and in the blogosphere, commercial property owners are fully aware that sustained job creation is the only way to decrease vacancies and increase absorption, rents and property values. However, economic data provided by various agencies continue to paint a bleak picture about job growth, at least in the short term.