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Shadow Office Space Inhibiting the Office Market Recovery

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According to their 2011 U.S. Macro Forecast report by Cassidy Turley from the WSJ, Shadow office space has been affecting the office space for lease recovery already.

In the article, "The U.S. office sector needs to absorb 126 million square feet of empty space to return to pre-recession vacancy levels, the forecast says. The number of “office-using jobs” created last year should have resulted in 53.1 million square feet of office absorption for 2010. But, because of shadow space, only 18 million square feet of space was absorbed for the year.

But the report says the drag of shadow space will be less severe this year, and vacancy rate will move down (it was 16.7% in the fourth quarter). Still, vacancy won’t reach pre-recession levels — between 12.5% and 13% — before 2014. And rents will remain where they are now for another two years."

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City To Rent Office Space at WTC 4 in 2014 Despite Excess Space Now

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Despite having found 8,000 empty desks the City of New York will be forced to rent 582,000 square feet of office space in Building 4 of the World Trade Center when it is completed in 2014. The empty desks can be used to estimate that the City has over 1,000,000 square feet of excess office space, also know as shadow office space. The question is will they actually occupy it or sublease the prime office space. Their contract price is $56.50 / sf. The timing could be good for the come-back of the Manhattan office space market as the recession continues to improve. Source

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Shadow Office Space and the Office Market Recovery

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Over the past nine months we have made numerous posts on the effect that shadow office space will have on the office space market recovery. In a recent article from CNBC some numbers show the effect that shadow office space will have on the market. According to Co-star shadow space is adding as much as 7 percent to the Los Angeles office vacancy rates and over 6 percent in Chicago. This is likely to be the case in most markets. The problem with shadow office space is that before the market can see a full recovery, shadow office space will need to be absorbed.  Typically, shadow office space is space that a company still has under lease, but is not in use. Before these companies who have shadow space will go out into the market to lease additional office space, they will need to fill their shadow space.

Additionally, Grub and Ellis is predicting that as the market recovers shadow space will account for about 1/3 of the increased demand in 2011 and 1/4 of the office space demand in 2012, thereby dampening the office space market recovery. The good news is that we are starting to see positive absorption. As the jobs come back, the office market will improve.

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Shadow Office Space to Affect Office Space Recovery

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A recent article on Bloomberg.com discussed the impact of "Shadow Space" on the recovery of the office space market. The officeFinder Blog discussed the affect of "Shadow Space" on the market back in April 2010. We defined it as "Shadow Office Space is office space that is currently under lease by a tenant, but which is not being used due to layoff of employees." Here is what the Bloomberg article had to say:

"The U.S. office sector will be the slowest to recover as companies absorb empty space and advances in technology reduce the need for square footage, said Kenneth Rosen, a professor at the University of California, Berkeley.

Unoccupied “shadow inventory” accounts for 3 percent to 5 percent of total business leases, and that space will be filled before firms sign new rental agreements, Rosen, chairman of Berkeley’s Fisher Center for Real Estate and Urban Economics, said at a conference in San Francisco. Cloud computing and other tech advances let employees work away from offices, further reducing space needs, he said.

“Every company has shadow space,” Rosen, who also runs Berkeley-based hedge fund Rosen Real Estate Securities LLC, said in an interview yesterday. Most U.S. cities face prolonged vacancies because of the surplus, excepting Washington, New York, San Francisco, Boston and parts of the Silicon Valley, where technology and venture capital spur leasing, he said."

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JLL Sees Recovery Signs for Office Market

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CHICAGO-Signs of a national office market recovery, including the peaking of sublease space and rents bottoming out, began appearing this year, according to Jones Lang LaSalle in its First Quarter 2010 North American Office Outlook. However, company research experts believe that though confidence is returning, job growth will be slow to recover until at least the beginning of 2011.

The national office vacancy rate rose by 20 basis points to 18.3% in Q1 2010, but this increase was relatively stable compared to the vast losses of space, more than 200 basis points, from quarter to quarter in 2009, said JLL officials. Also, the amount of available sublease space nationwide has dropped for the past two quarters, says John Sikaitis, JLL’s director of national office research.

However, the amount of shadow space, offices leased by tenants but not used, has grown at large firms, Sikaitis tells GlobeSt.com. “Many large corporate tenants have excess space, in excess of 9%, that will absorb any new growth this year,” he says. “For example, when company X goes out and hires 10 people in the next three-to-six months, they won’t need more room. Because of this, we believe the first wave of growth is not going to result in much occupancy gains.”

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