Commercial Investment Real Estate Winter 2020 | Page 15

Office Effective Rent Growth
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0%
and apartment buildings.
However, the jury is still out on which
format and offering will prevail. In the mean-
time, the rate at which office space was built
from 2003 to 2008 was about half that from
1997 to 2002, and it has slowed further in the
current period of economic expansion.
NEAR TERM OUTLOOK
Reis does not expect the U.S. economy to
grow by more than 2.0 percent to 2.2 percent
this year, and this in itself is a slowdown rel-
ative to the 2.9 percent growth rate in 2018
that was a recent high watermark (the last
comparable figure was
in 2014). While you
Lorem ipsum
could argue that 2018 growth numbers were
“sugar fueled” by the Tax Cuts and Jobs Act,
any such boost in economic activity failed to
materialize in stronger office fundamentals,
so it is reasonable to expect flat to middling
results for 2019. We have already seen this
play out for most of the year.
This is not to say that there aren’t
pockets of stronger office activity in specific
markets, related either to relatively strong
job growth or the presence of active, grow-
ing industries like tech. But in a world of
relatively flat fundamentals, the gap between
strong and weak metros tends to be larger;
for example, office fundamentals in central
business districts have been markedly stron-
ger compared to suburban neighborhoods.
This all argues for greater care and diligence
when evaluating opportunities and risks for
this property type.
Perhaps this is all for the best. If de-
mand for office space is less than stellar, then
why exacerbate the problem by overbuild-
ing? Supply growth has been measured,
and if we do run into any kind of economic
downturn in the near term, it follows that
Maybe slow and steady
over 10 years is indeed
better than a three-year
boom followed by
a massive pullback over
the following decade.
office fundamentals will likely experience
less distress. Maybe slow and steady over
10 years is indeed better than a three-year
boom followed by a massive pullback over
the following decade. It is worth noting that
despite strong tech market activity over the
last decade, San Francisco’s office rent levels
have yet to achieve its historic highs from the
year 2000 — almost two decades after the
tech bust.
Victor Calanog, PhD, CRE
Chief economist and senior vice president at
Moody’s Analytics Reis
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