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 it.
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.
Supply vs. demand
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 space.
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 2009.
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 2009.
Vacancy rates rise
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 since 1945.
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 earlier.
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.
Stimulus may help
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 job losses.
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.
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