Spending for new office construction is typically an
excellent indicator of the future demand for office furniture
for the simple reason that new space coming into the office
real estate market will require furniture and fixtures to fill
As spending for office construction increases, office
furniture and fixture manufacturers typically know that demand
for their product will be increasing in the near future as this
space comes on line.
The one complicating factor lies with the demand side of
this equation the new space coming into the market must be
absorbed (rented or sold) or it will lie vacant. Space
absorption is heavily dependent on the job market.
As jobs (particularly office jobs) increase, so will the
absorption of office space.
Conversely, as jobs decline so will the demand for
Unfortunately for the office furniture industry, the
market's supply and demand factors moved in opposite directions
in 2008: Supply (construction) continued to grow at a healthy
pace, but demand (the job market) declined precipitously and
that bodes poorly for office furniture manufacturers in
Spending for office construction remained boisterous in
2008: Construction rose by double digits for the third
consecutive year, advancing 12 percent to $72.7 billion.
During the two previous years, construction had climbed 18
percent in 2006 and 19% in 2007. Under normal conditions (where
supply and demand are fairly balanced), these increases would
suggest the office furniture market would remain very strong in
But this year's conditions are anything but normal. In fact,
we saw a dramatic decline in jobs during 2008 and that has
created a significant imbalance between the supply and demand
for office space. In 2008, the economy suddenly shed 3.0
million jobs, many of them in office-using industries.
In January 2009, the economy lost another 598,000 jobs,
bringing total losses since the start of the recession to 3.6
million. What's more, half of those jobs (1.8 million) were
lost during the most recent three-month period (November,
December and January), pegging the worst three-month job loss
Office vacancy rates, which measure the percent of office
space available but not leased, are a good read on the match
between supply and demand. Not surprisingly, those rates are on
the rise, suggesting that supply is outstripping demand.
In the fourth quarter of 2008, the downtown office vacancy
rate ticked up to 11.7 percent from 10.3 percent a year
Suburban vacancy rates, which began to rise earlier than
downtown rates, have climbed to 16.3 percent, up from 14.2
percent at the end of 2007.
Downtown rates are now their highest since the third quarter
of 2006 and suburban rates are higher than at any time since
the first quarter of 2005.
In an effort to better match demand, office construction
spending is expected to pull back 16 percent in 2009 to $61.1
billion. Unfortunately, with further declines in employment
expected during 2009, vacancy rates are likely to continue
climbing through the year.
By the end of 2009, the unemployment rate could surpass 9
percent and may even slip into double-digits for the first time
since June 1983.
The only mitigating factor facing the office market today is
the possible benefit from the
federal stimulus package
While that package won't directly help office construction,
it is expected to create three million jobs and prevent other
That will be an indirect help to the industry as it provides
a floor to job losses during 2009.
More than ever, this is a year in which we should take the
help wherever we can get it.
This year's NeoCon was an affirming experience.
The manufacturing exodus doesn't have to be happening.
A stronger housing market would have a strong impact on the overall economy.
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