By the end of 2005, employment levels in industries that take up office space finally exceeded those at the end of 2000.
Gains came across the board in professional services, construction, education, healthcare and leisure and hospitality.
Still, throughout 2005, the office market continued to reflect national economic volatility. The second half of 2005 didn’t bolster hopes for a robust economic pickup.
While there were moments of credible optimism, overall the economy chugged along, just maintaining positive momentum.
Gross domestic product growth reached a high of 4.1% at the end of the third quarter. The fourth quarter saw 1.1% growth, the weakest recorded since the end of 2002.
Employment growth for November totaled 305,000 jobs followed by only 108,000 jobs in December.
Growing inventories could be a precursor to growth this year, along with increased federal and consumer spending.
Inflation and energy prices, spurred by expected increases in global energy consumption, remain the only foreseeable concerns.
New areas are emerging as leaders in the office market, including Washington, D.C., Midtown Manhattan, Oakland, Houston and Denver.
These markets can maintain their growth because of historically strong market fundamentals. The nation’s capital in particular and Manhattan’s Midtown benefit from increased investment in the finance industry and healthy capital flows.
Markets such as San Francisco, Silicon Valley, Seattle and Dallas maintained positive momentum, consistently expanding despite economic fluctuations.
Seattle, Dallas Strong
Seattle and Dallas closed the year as market leaders, benefiting from rising rents, decreasing vacancy rates and strong job growth forecasts.
San Francisco and Silicon Valley both experienced solid momentum in the past year and will continue to expand with expectations of decreasing vacancy rates and rising rents.
Markets that maintained positive momentum in the past six months but appear to be peaking include Indianapolis and Minneapolis.
Across the U.S., market momentum was largely positive but slow. Chicago, St. Louis and Detroit remain static, mostly a result of slow growth and a slightly higher than average unemployment rate.
Economic momentum in some areas of the South is beginning to slow with stalled job growth.
As a result, markets such as Miami, Jacksonville and Atlanta are leveling off.
Palm Beach continues to perform well due to unparalleled job growth, fueling the smaller office buildings. It will maintain its leading position among smaller markets.
Suburban Markets
The majority of suburban markets retained positive momentum through 2005. Markets expected to lead in 2006 include Phoenix, the Inland Empire, Houston and Northern Virginia.
The markets all should see rising rents and declining vacancy rates out to 2007.
Specifically, dynamic job growth is the stimulus for office market expansion in the Phoenix suburbs and the Inland Empire.
Gains in both markets are above regional and national averages and stem from strength in the transportation industry.
Houston’s office market has moved in a positive direction with recent job growth from the influx of those affected by Hurricane Katrina and with growth at oil companies.
Several suburban markets with historic stability and proximity to major financial markets maintained momentum including suburban Maryland, Westchester, N.Y., and northern New Jersey.
Other markets began to level out during 2005, including Miami, the westside of Los Angeles and Fairfield County, Conn.
Those markets saw substantial growth from 2004 through mid-2005. But now the outlook is for more stable market conditions rather than expectations of vast growth.
National Absorption
Overall absorption was 15.2 million square feet in the nation’s central business districts and 40.2 million square feet in suburban markets.
The majority of all markets posted strong, positive absorption. Midtown Manhattan led central business districts with 2.6 million square feet. Northern Virginia led suburbs with 4.9 million square feet. Nationally, business district and suburban levels exceeded those of last year, by 7 million square feet and 10 million square feet, respectively.
Absorption levels for the next two years should continue to be positive in both of the areas.
Office Completions
Construction completions for 2005 totaled 5.2 million square feet in business districts and 12.4 million square feet in the suburbs. Business district completions were at a seven-year low. Suburban completions were at a nine-year low.
Washington, D.C., led business district completions with 1.9 million square feet, followed by 1.8 million square feet in Chicago.
Northern Virginia led suburban markets with 2.2 million square feet of completions, followed by 1.1 million square feet in Phoenix.
In business districts, space under construction is on par with levels at the end of last year while suburban activity is at its highest levels since 2001.
Several major business district markets have significant space under construction. Washington, D.C., and Midtown Manhattan boast the highest levels, with 6 million square feet and 5.6 million square feet, respectively.
Analysis by Cushman & Wakefield Inc.
