Competition for Staff ‘Invigorates’ Office Space Demand

The expanding job market should have positive effects on the office sector, and might even rejuvenate retail, two reports said.

Marcus & Millichap noted the labor market has entered a “new paradigm” as the number of job openings exceeds the number of people out of work and seeking employment coverage. There were 6.7 million job openings at the end of April while the number of unemployed sat at 6.3 million. “But despite this abnormal condition, employers and the economy have found ways to keep employment expanding at a quickened stride,” the company’s Research Brief said.

“The numbers continue to reflect a ‘goldilocks’ economy–not too hot, not too cold–and they are consistent with the commercial real estate statistics that show healthy gains in most sectors,” Reis Senior Economist Barbara Byrne Denham said in a special report, May Employment Results for Commercial Real Estate.

Byrne Denham said job growth in 2018 has exceeded 2017’s pace. She noted the retail sector added 31,100 jobs in May after adding 8,800 jobs in April. For the year, the retail sector has registered a gain of 125,100 jobs since May 2017, with 19 percent of those added happening in non-store e-commerce retailers. “Thus, the retail jobs numbers continue to defy the reports of store closures,” she said. “Although, with more store-closing reports from Sears and Kmart later this year–not to mention the Toys R Us closings this quarter–these numbers could change.”

Marcus & Millichap said the increase in office-using employment has driven down that sector’s vacancy rate. The professional and business services sector has been expanding at a faster pace than overall employment, driving up office demand. The sector added almost 500,000 jobs in the last 12 months–a 2.5 percent growth rate compared to a 1.6 percent national job growth rate. The increased hiring drove the national office vacancy rate down to 13.8 percent in the first quarter. “Furthermore, new supply additions continue to run below the levels witnessed during the 2000’s, which has helped maintain a declining vacancy rate with demand rising,” the report said.

Class B and C office buildings are outperforming Class A properties, Marcus & Millichap reported. Since 2012, Class B and C office rents have seen higher growth rates than Class A properties nationally. With demand for Class B and C properties significantly higher than the limited new supply to those classes, Class B and C properties have a 12.3 percent vacancy rate on average compared to 16.3 percent for Class A buildings.