Crystal Ball Sees Slow Recovery for Commercial Real Estate in 2003

Recent third quarter economic growth numbers hit 8% -- the highest growth in the economy in over 25 years. Yet, job growth across the country remained flat. Without job growth, there is no chance for a strong recovery in the commercial real estate sector. How is it possible that we could see such stunning growth in the economy, yet it does not lead to job growth?

First, the positive economic growth that we are experiencing is coming off solid increases in productivity. Combining layoffs, consolidations of job functions and taking advantage of lower borrowing costs, businesses have once again turned in profitable numbers to their bottom-line.

Most economists suggest that this economic growth will continue through 2004 but not at this torrid pace. One would have to question whether job creation of any impact will occur if the economy begins to settle into a more stable growth cycle.

Commercial real estate particularly the office market, lives and dies on job growth. Since the 1980s, commercial office development exploded not on the basis of actual need but on the theory "that if you build it they will come". Back in the late '80s, the country saw vacancy rates hit almost 20% on average. Then, most market watchers were stating that we have a 20-year supply of office space to absorb. It was not until the dot.com boom did we see overall vacancy figures hit single digits. Now, vacancy factors are back to high teen's across the country.

The dot.com market was a temporary boom that got developers and owners excited about the prospects of a vibrant, extended office market before them. What they discovered, unfortunately, was once this short boom ended they were back to exactly where they were in late 1980s -- both in terms of overall vacancy and rental rates.

The reality is that the expansion of office development of the '80s was never absorbed by traditional office expansion. Today, with less need for larger server rooms, large conference rooms, larger executive private offices and libraries, businesses simply need less space to operate.

There is hope that a new business model will develop that will need large blocks of space. Bio-tech -- although hyped as a the next savior of commercial real estate landlords -- has not proven to have the impact once expected. Wi-fi and other wireless products, including Internet phones, could lead to a rapid expansion of new firms but probably at the expense of traditional telecommunications companies.

What will create some recovery are the continued bargains to be found in securing new office space in 2004. Businesses can once again "spread out" their operations over more square footage as they expand, thereby creating better work environments for their employees without increasing their office rental budgets.

Looking into my crystal ball I see vacancy rates going down 0.5% to an overall average of 17% across the country; rental rates remaining flat for larger floor plates of 25,000 square feet or more; and, rental increases of 5% to 10% on office spaces under 10,000 square feet in most major cities throughout country.