Based on Results of Reis Survey, Genesis Capital Asks How Healthy is the Office Market Sector As a Barometer of the Economy?

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U.S. office space can be a very useful barometer to determine the health of the economy. Commercial real estate vacancies numbers serve as a good proxy for the growth of business; in good times vacancies dwindle as employers add to their numbers, and in bad times vacancies become more pronounced as businesses cut back or even close up shop for good. The Reis Study reveals the latest numbers on office vacancies.

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It should come as no surprise that office vacancy rates are tied to employment. Few companies are going to lease space when they are cutting back on the number of employees, or not hiring.

U.S. office space can be a very useful barometer to determine the health of the economy. Commercial real estate vacancies numbers serve as a good proxy for the growth of business; in good times vacancies dwindle as employers add to their numbers, and in bad times vacancies become more pronounced as businesses cut back or even close up shop for good.

Based on the latest numbers from commercial real estate research firm Reis, office vacancies in the U.S. remain depressingly high and well above the levels seen in 2007. Fourth quarter vacancies were reported to be 17.1 percent, which is little changed from the beginning of 2012 when rates were 17.2 percent. In fact, it is just 0.5 percent off the peak of 17.6 percent in Q3 and Q4 of 2010, showing little improvement overall for the past 2 years. In contrast, prior to the financial crisis in 2007 the rate was just 12.6 percent.

“While some sectors of commercial real estate are doing quite well - multi-family comes immediately to mind - the office sector is likely to be one of the last sectors to recover, in our opinion. Vacancy rates will need to become substantially better before builders are going to step in with new construction,” said Terry Robinson, the President of Genesis Capital.

While tenants leased 3.7 million square feet in the fourth quarter, that is down from the 4.8 million square feet leased in the third quarter, certainly no sign of a strong market. Ryan Severino, chief economist for Reis explained very succinctly why office vacancies continue to haunt the commercial real estate sector; “Without a robust labor market recovery there will be no robust office market recovery.”

Even though employment reports have been improving, December saw a paltry 155,000 jobs added. That is barely enough to stay afloat and the unemployment rate continues to remain high at 7.8 percent.

It should come as no surprise that office vacancy rates are tied to employment. No company is going to lease space when they are cutting back on the number of employees. That also weighs on commercial real estate, since builders are unlikely to construct new office space when nearly 1 in 6 offices are vacant.

Reis also reported a lackluster 0.8 percent gain in average rental rates, further pessimism for new construction in the office sector.

About Genesis Capital
Genesis is a dynamic nationwide network of seasoned commercial real estate and financial professionals that believe in the potential of today’s market. Our members source assets directly from Banks, Servicers, Lenders and Private Clients. The members of Genesis have participated in commercial real estate transactions totaling nearly $7 billion.

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Kathy Heshelow
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