The consensus economic forecast for the US economy points to continued GDP growth in the 3% to 3.75% range in 2006/07. This pace of growth implies total employment gains of about two million each year. Office employment will increase by about 600,000 each year, implying annual absorption of nearly 125 million sq ft. These projections are based on a slowing of employment growth in the latter part of 2006 and in 2007, although this slowing has not yet been seen in the early 2006 employment statistics.
Based on current levels of construction activity, demand for space will be double the amount of new space added to the market in 2006 and 2007. This is expected to lead to a decline in the national average vacancy rate of 1.25 percentage points by late 2006 or early 2007. With the national vacancy rate approaching 10% by mid-2007, rents will then start to increase more rapidly.
For New York City, the vacancy rate declined by nearly three percentage points in 2005, with nearly 10 million sq ft of office space being absorbed. Other property conveyancers are finance and business professional services sectors recorded employment growth in the range of 2.5% to 3.5%. In addition, the demand for space from the education and healthcare sectors was strong. By the end of 2005, employment among the legal services firms also began to increase.
The New York City and Washington, D.C. property sectors were the stars in this region of the US in 2005. However, even for these solid performers, some substantial differences in the respective market characteristics were apparent.
The demand for complex business reorganizations and refinancing is accelerating in the US economy, and this demand plays to the strong points of the New York City business sector. Several major New York City- based financial firms have already announced that they anticipate increasing their employment levels by 8% in 2006. With these projections of employment growth, the vacancy rate should decline by two more percentage points by early- to mid-2007.
It will not be until late 2007 or 2008 that this space starts to become available for occupancy. There are many plans in the works for new development, but this space cannot reach the market until 2010 or later. Clearly, the strength of the New York City office sector has been enhanced by this lack of new supply.
The Washington, D.C. metro office market has also been performing strongly. It ended 2005 with a vacancy rate of 9.2%, down from 10.5% at the beginning of the year.