Predicting Office Space Demand in 2017

By Dr. Joshua Harris

Net Absorption of Office Space Forecast to Decline but Expected to Remain Positive

As the final quarter of 2016 unfolds, Dr. Hany Guirguis, Manhattan College, and Dr. Joshua Harris, University of Central Florida, project that the U.S. office market will post approximately 33.0 million square feet of positive net absorption for the year.

Over the coming eight quarters, net absorption is projected to range between 3.7 and 9.6 million square feet each quarter, down from the quarterly range of the previous forecast, which was 8.4 to 13.1 million square feet. This lower range is due predominantly to increased variance in two of the model’s five key variables: GDP and office-using employment.

The U.S. economy expanded through most of 2016. The first estimate of third-quarter GDP growth registered an annualized rate of 2.9 percent, the highest reading in more than a year. Still, GDP is not likely to grow by more than 2.0 percent for the year. As core inflation has been at or near 2.0 percent for several years, the probability is very high that the Federal Reserve Board will increase key rates at a faster pace, beginning in December.

The net effect of rising rates and slow overall growth have led to a 2017 net absorption forecast of roughly 32.0 million square feet, very similar to the 2016 level. What is noteworthy about this forecast is the increased variance of the upper and lower boundaries of the confidence intervals, which indicate that sporadic quarters of negative absorption are possible in 2017, though not very likely.

Overall, the office sector is better positioned for expansion than some of the other real estate sectors. Office-using employment growth has continued at a robust pace, and both the model and consensus forecasts project that this will continue. Overall, year-over-year, non-farm employment in the U.S. grew at an average monthly rate of 1.7 percent between May and September 2016, compared to all office-using employment sectors, which averaged 2.4 percent growth over the same period.

Among office-using jobs, two NAICS Supersectors — “Professional and Business Services” and “Financial Activities”— have been the strongest, with average year-over-year growth rates (i.e. May to May, June to June, etc.) between May and September 2016, of 2.8 and 2.0 percent, respectively. Barring unforeseen circumstances, the model assumes that this job growth will continue and should support positive net absorption of office space. Still, the risk of a downturn in the macro economy is arguably higher today than it has been in recent years, but the risk of a true recession remains relatively low. Moving forward, it will be critical to monitor interest rates, as sudden spikes could harm corporate profits, which would likely reduce hiring in the office sectors and thus demand for office space.

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