Looking Ahead: The Office Space Demand Forecast

This May, the NAIOP Research Foundation released the inaugural Office Space Demand Forecast to predict net absorption of U.S. office space over eight quarters.

Created by researchers Hany Giurguis, Ph.D. of Manhattan College and Joshua Harris, Ph.D., CRE, CAIA of the University of Central Florida, the model is similar to the Industrial Space Demand Forecast which successfully projected a drop and rebound in net absorption of industrial space in 2009 and 2010. Below are the leading, coincident and lagging variables used in the forecast.

The growth rate in real growth domestic product (GDP) captures the broadest level of macroeconomic activity, reflecting the value of all goods and services produced in a given year. The strongest correlation indicates a two-quarter lead over net absorption.

Corporate profits of domestic industries directly capture the financial capacity and growth of firms that may need to expand. Profits are a source of retained earnings, so they provide a clue about how much money is available to fund investments in plant and equipment, an activity that raises productive capacity. The strongest correlation indicates a one-quarter lag behind net absorption, yet contemporaneous correlation is also strong, making this a strong coincident indicator.

Total employment in the financial services sector is a direct measure and proxy for office-using employment that best fits with changes in office space demand. Employment in financial activities was found to correlate with a four-quarter lag behind net absorption. However, contemporaneous correlation was also strong, making this a strong coincident and confirming indicator.

Two variables from the Institute for Supply Management’s Non-Manufacturing (ISM-NM)indices serve as proxies to measure the future health of office-using firms. The ISM-NM Inventories Index measures changes in inventory, indicating increases, decreases or no change in inventory levels, while the ISM-NM Supplier Deliveries Index measures how long it takes suppliers to deliver parts and materials that are integral to service sector businesses.

In the graph below, the “test forecast” shown in gray for 2013 is an out-of-sample forecast, meaning the model did not know the actual number of square feet absorbed, enabling it to make predictions. The “forecast” shown in red was generated as the model was being built; it indicates what absorption levels would have been using the model. The blue line shows actual net absorption.

The first eight-quarter Office Space Demand Forecast was released in May 2016. Net absorption is forecast to range between 8 and 13 million square feet each quarter. The forecast is available online at naiop.org/research.

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