The Office Market
THE OFFICE MARKET The commercial office market generally follows a cyclical pattern with changing supply and demand forces. Many factors impact supply, including growth in the labour force and, more specifically, workers requiring office employments. As with other types of real estate, demand expands during buoyant economic times, and contracts when downturns or recession periods are encountered. Supply is similarly affected by several key factors. Under normal circumstances, office construction activity will expand to meet rising demand, but only if other factors are in play. For example, mortgage funding must be readily available, as most office buildings require considerable capital given the size of most commercial projects. Other factors include the availability of land for such development, favorable zoning provisions, and municipal or government incentives and policies. KEY INDICATORS Commercial analysts have developed key indicators to assess the relative strength or weakness of the commercial office market including: • Available office space (existing total square footage); • Inflow of new office space (total square footage); • Absorption rate (the rate at which space is leased/occupied over a specific time period such as monthly, quarterly or yearly). Typically, analysts prefer net absorption rates as a more accurate measure. The net figure reflects total office space leased less space vacated during the period under analysis. • Vacancy rate (unleased/unoccupied space as a percentage of total office space for a specific period); and • Rent rate (rate per square foot). Typically, analysts prefer the net rent rate for comparison purposes; i.e., the rent paid after netting out taxes, maintenance and operating expenses paid by the tenant.