Only Half Of Office Space Vacated Since Lehman Has Been Reoccupied

Tyler Durden's picture

One would think that with the economy, allegedly, growing at above-trend rates as Goldman has wagered for the second time in 4 years (the first time Hatzius was dead wrong), with jobs being added at what the BLS would have the market believe is a healthy 200K+ monthly clip, and of course with the S&P500 at record all time highs now on a daily basis, that the US business services sector would be humming along nicely, with little to no slack. One would be wrong: according to the WSJ even with all this alleged economic activity and all post-Lehman job losses having now been recovered, "employers have only reoccupied about 52% of the 142 million square feet that went vacant amid the economic downturn."

The WSJ adds that the office vacancy rate remained unchanged in the second quarter at 16.8%, still near its postrecession peak of 17.6% in 2010 and well above the 12.5% rate in 2007. In other words,

So what is causing this crunch in office space demand? Well, the primary culprit is most certainly asking rent, which keep rising despite the apparent lack of demand for the simple reason that landlords can afford to keep properties empty: with record low cost of capital, it is better from a game theory perspective to ask ever higher prices instead of engaging in a cost-cutting war with competitors for marginal renters:

[R]rents sought by landlords have grown 7.2% since 2010 and 0.7% in the second quarter to an average annual rent of $29.49 a square foot, according to the Reis report, which tracks 79 metropolitan areas. Rents typically rise with modest growth, even if vacancy is relatively high.

 

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Most markets saw some rent growth over the past year, with only three—New Haven, Conn., Buffalo, N.Y., and Milwaukee—registering small declines.

There may be other, more palatable reasons, of which the most important one is cutting on costs, and boosting productivity:

Seyfarth Shaw LLP, a Chicago-based law firm, announced in April it was moving to the Willis Tower, where it would occupy 195,000 square feet, from a nearby building where it occupies 300,000 feet, despite employing a steady number of lawyers. The firm plans to shrink workspaces, cut back space devoted to a law library, and, in a rarity for the legalprofession, it is considering taking some lawyers out of private offices and placing them in cubicles, particularly those who work part-time,said Peter Miller, a managing partner at Seyfarth.

 

"We have an obligation to our clients to reduce our overhead and be more efficient," Mr. Miller said, adding it will save "multiple millions per year."

And then there is the simplest possible explanation, which usually is the correct one: businesses are not operating at the same level now as they were at the last bubble peak level for one simple reason: the economy is in far worse shape than the various seasonal adjustments and "weather scapegoaters" would want people to believe.