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Office Space Demand Forecast Solid through 2018

It’s impossible to predict the future with complete accuracy. However, it is crucial to make informed forecasts about future demand in the commercial real estate industry. “Whether they are players in politics, diplomacy, or business, or are just engaged citizens, practical people cannot begin to make plans without making an educated guess as to what is coming next,” writes Ruchir Sharma, an investment manager at Morgan Stanley, in his book “The Rise and Fall of Nations.” He adds that people “are duly skeptical of crystal balls, but they need to look forward, and to recognize misleading economic futurology when they see it.”

This is where NAIOP’s research can help. The NAIOP Research Foundation provides regular forecasts of the upcoming need for office space and industrial space as part of the foundation’s overall mission to “support developers, owners and others involved in commercial real estate in meeting and exceeding the needs and expectations of our communities, now and in the future.”

In the most recent study, published in May, Dr. Joshua Harris of the University of Central Florida and Dr. Hany Guirguis of Manhattan College forecast that almost 40 million square feet of office space will be absorbed in 2017. That would track with 2016, when more than 41 million square feet of such space were taken.

“Many uncertainties remain, including potential tax reform, health care reform, and even fundamental changes in federal budgeting,” Harris and Guirguis write. “If President Donald Trump can strike deals on some or all of these fronts in ways that are favorable to business, the economy may experience a significant increase in the rate of overall growth, increasing annual GDP growth to between 2.5 percent and 3.5 percent.”

So far, lawmakers haven’t made much progress on any of those fronts. Halfway through the year, they’re still wrestling with a budget, working on a health care reform bill, and discussing changes to tax policy.

But as House Speaker Paul Ryan makes clear, they remain optimistic. “Just last week, the House passed bipartisan legislation to expand career and technical education opportunities,” he wrote on June 27. “This is a jobs bill that will allow people to get the skills they need through apprenticeships and trade work. It will help put America back to work.” He adds that Congress and President Trump are also working to roll back regulations.

Harris and Guirguis write that, “Actual net absorption is much more likely to surprise to the upside than to the downside, at least for the remainder of the year.” In fact, they forecast that the biggest problem may be that there isn’t enough built space available to absorb, since “more and more markets are short on vacant, high-quality office space for tenants with immediate needs.”

The office space demand forecast is updated twice a year, in May and November. It takes five key measures into account:

  • The growth rate in real gross domestic product (GDP).
  • Corporate profits of domestic industries.
  • Total employment in the financial services sector.
  • The Institute for Supply Management’s Inventories Index.
  • The Institute for Supply Management’s Supplier Deliveries Index.

The forecast relies on dynamic rather than static methods because of the changing nature of the macro economy. It uses data from CBRE Econometric Advisors, which isn’t involved in the forecasting. Information includes office buildings in the U.S. that have at least 10,000 to 150,000 square feet of rentable area.

Last year, the forecast called for 33.0 million square feet to be absorbed. That was very much in the ballpark, being only 8.4 million square feet less than actual absorption.

As the saying goes: “It’s difficult to make predictions, especially about the future.” This humorous quote — sometimes attributed to Yogi Berra, but also to many others — notes the inherent challenge of correctly predicting an unknowable future. Yet business leaders are making informed projections about the future in order to plan ahead with assistance from NAIOP.

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