(This article first ran in the Richmond Times Dispatch)
Commercial office space is the other shoe that many investors thought would fall and disrupt the banking system in a manner similar to housing foreclosures. Despite the large employment losses, that hasn’t happened. At least not in the Richmond market.
Richmond area office vacancy rates have been trending downward since 2009 according to Thalhimers and stood at 10.9 percent in the second quarter of 2011. Of course, it varies around the region with their ‘Parham South’ submarket showing the highest vacancy at 18.7 percent; Innsbrook was 25% a year ago and is now 15.9%; and ‘West Creek’ is the lowest at 0.1 percent. The vacancy rate in Richmond’s central business district was 13.6 percent. By comparison, the national vacancy rate for central business districts was 13.9 percent during the same period according to Cushman & Wakefield.
Office vacancy rates typically rise during the later phase of a recession as businesses consolidate some departments and rent out excess space. So, it’s not surprising that vacancy rates are above their ‘frictional’ level of 5 to 6 percent given the current unemployment rate.
The recession officially ended two years ago. Even so, with the slowdown in national growth, the seasonally adjusted unemployment rate in the Richmond metro area increased to 7.3 percent in August from 6.8 percent in the prior month.
This suggests continued weakness in the office market. But not all employees work in offices. For example, most people working for construction, retail, transportation, or manufacturing firms don’t work in an office.
When employment trends for non-office industries are deducted from the Richmond employment totals it becomes apparent why the office market has held up reasonably well. In the year ending with August 2011, Richmond shed 8,974 jobs; only 1,793 of those jobs were in firms that typically need office space.
Aside from the demand for space created by office workers, the fact that new office construction was limited kept the vacancy rate from rising much further in the Richmond area. This is in stark contrast to the 1990 recession when an oversupply of office space was one of the drivers in the recession. At that time the Richmond office vacancy rate peaked at almost 20 percent.
Barring a double dip recession, the office market should improve much more quickly than the residential housing market.
Christine Chmura is president and chief economist at Chmura Economics & Analytics. She can be reached at (804) 649-3640 or at email@example.com.