Economy Watch: Strong Labor Market Could Impact Office Sector

The U.S. office market has been facing a confluence of factors, including a tight labor market, which will likely lead to a "moderate slowdown" next year, a recent CBRE report noted.

office spaceThe U.S. office market is set to face a “moderate slowdown” in 2017 because of a confluence of factors, mainly due to softer tenant demand and an increase in new supply, CBRE reported in its recent outlook for the U.S. real estate industry. “Firms are finding it increasingly difficult to find qualified workers, which is reflected in the low unemployment rate… and real wage growth.”

Thus, the company predicted, next year will see a lower net gain in office-using jobs nationwide. CBRE calculates that a net of 273,400 office-using jobs will be created in ’17, which is both considerably fewer than in 2016 (which will probably total a net of 413,600 jobs when everything is tallied), and the 2010-16 annual average of 418,100 per year.

At the same time, CBRE anticipated that there will be more than 50 million square feet of office space completed next year, the most since 2009 (all of which was started before the recession). This influx in supply, the company predicted, will result in an uptick in the national vacancy rate to 13.3 percent, compared with 13 percent this year. Office rent increases will slow to about 1.5 percent for the year, or roughly the rate of inflation.

The strength of the job market next year will also play a role in the growth of the office sector. Speaking at The University of Baltimore 2016 Midyear Commencement on Monday, Fed Chair Janet Yellen had this to say about the matter: “After years of a slow economic recovery, you are entering the strongest job market in nearly a decade. The unemployment rate, at 4.6 percent, is near what it was before the recession. This is a level that has been associated with good job opportunities.”

“Job creation is continuing at a steady pace; the layoff rate is low; and job openings are up over the past couple years, which is another sign of a healthy job market,” she added. “There are also indications that wage growth is picking up.”