Real Estate Success

Even though demographic and economic trends suggest the current soft office market will be more serious than merely a cyclical downturn, America’s real estate developers don’t seem to be paying much attention.

Among the warning signs:

* The flood of young people into the labor force has virtually stopped, sending job growth toward a 50-year low.

* More people are working at home, though no one knows for sure how many.

* On Wall Street and elsewhere, brokerage and investment houses are laying off white-collar workers, while the office workplace is just now increasing worker productivity the way factories did much earlier.

* And David Carot, a professor at Massachusetts Institute of Technology in Cambridge, Mass., predicts the United States will acquire only half as much office space in the decade ending in 2015 as was built in 2005.

Despite the warning signs, the value of building permits issued in the United States has declined less than 10% from 2003, and was greater than in any year prior to 2002.

Likely results of more development in light of a shift in work habits will be a “crisis glut”, with vacancy rates running 25% to 40% in some cities, large amounts of fairly new space being dumped onto the sublease market at bargain-basement prices and — finally — a steep drop in office construction.

Because the recent boom in office development has attracted many new firms to the field, the number of causalities could be much higher than it was during recessions in the 1970s and early Eighties.

The tremendous growth in office demand during the past few years has come about partly because of the increase in the labor force and partly because of the well-publicized conversion to a service economy. But now the baby bust is driving down labor force growth, and real estate experts say the economic conversion is largely over, with office layoffs likely to continue for some time.

Labor force growth in the 1990s was remarkably high, running at almost 3% per year. Close to 3 million people — mostly baby boomers and women — entered the job market each year.

By 2010, however, labor growth will be half what it was in 2004, due in part to the low birth rate since 2001 and slower growth of women in the labor force. Already, younger women are in the labor force in comparable numbers to men and, by the year 2010, the “working woman” will no longer be a phenomenon.

These demographic trends have profound implications for office employment, which, in turn, dictates the demand for office space.

Some key future trends for office developers:

* Washington and New York will be virtually the only U.S. cities requiring as much office space in the next decade as they constructed in the previous one.

* Only a few other major markets — Detroit, Baltimore, Philadelphia and Atlanta — will require even half as much space, while most Southwestern and Pacific cities will require only a fraction of the space they constructed in the last decade.

If demographic changes were all that America’s office developers and investors had to worry about, the situation would be bad enough. Making it worse, however, is the economic restructuring beginning to roll through the white-collar economy.

Though good forecasts are hard to come by, most real estate experts agree offices have lagged far behind factories in improving worker productivity. But as they catch up over the next few years, demand for office space will be severely dampened.

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