I’m struck by the discrepancy in the recent performance of the office and industrial markets. One would expect their recoveries to proceed at roughly the same pace, but the uneven nature of this economic recovery is having an uneven effect on the recovery rates of these two property types.
- The industrial vacancy rate peaked at 10.9 percent in the first quarter of 2010, so the market has been in recovery for four consecutive quarters with the vacancy rate declining by 80 basis points to 10.1 percent during this period.
- The office vacancy rate, by comparison, peaked at 17.9 percent in the first and second quarters of 2010 and has fallen just 20 basis points to 17.7 percent in the fourth quarter of 2010 and the first quarter of 2011. In other words, the office market recovery just about flatlined in the most recent quarter.
The industrial market got an early jump thanks to the inventory rebuilding cycle. Beginning in July 2009, manufacturers began to see their order books increase as companies, which allowed their inventories to dwindle during the recession, were forced to restock. Production and shipments picked up, and absorption of industrial space turned positive in the second quarter of 2010. Demand has remained solid thanks to strong exports, business capital spending and a cautious rebound in consumer spending. The industrial market does not get far out of balance due to the shorter construction timelines for an industrial building (six months +/-) relative to an office building (18 months or more), so the recovery, as measured from the peak vacancy rate to a balanced market, is probably in about the fourth or fifth inning of a nine-inning game.
The office market is heavily dependent on the labor market. Although job growth has picked up in recent months, the improvement has not shown up in absorption of office space, which has been about one-third the rate of a typical office market recovery. This could be due to the normal lag between employment growth and space absorption (rule of thumb is two quarters) and/or to the prodigious amount of shadow supply (empty space still under lease) that built up during the recession. With the economy slowing (first quarter GDP of just 1.8 percent), it will be interesting to see if the labor market has enough momentum to power through the soft patch and propel the office market – only in about the second inning of its recovery cycle – toward equilibrium. The Employment Situation report, to be released this Friday at 8:30 a.m. Eastern by the Bureau of Labor Statistics, will help answer that question.
