Published May 2004

Office demand may depend on new jobs and profit

The direction of the office market is still an open question for much of Snohomish County. Typically, commercial real estate agents gauge business expansion under the assumption that demand for office space depends solely on job creation. The more jobs a business creates, the more space it needs, goes the logic. So agents find themselves polling major employers to ask them the rather narrow question: “Are you hiring?”

In an interview with GlobeSt. com, Peter Linneman, a professor of real estate, finance and public policy at the University of Pennsylvania’s Wharton School of Business, had a contrarian view of demand for office space that broadens the issue from a national perspective:

“Office-space expansion is a direct profit decision. The question decision-makers ask is: Are profits sufficient to justify increasing space or a move to a new building? And my experience is that no company will say yes to that unless they have had two years of profit growth — even if they’re huddled together like rabbits in a warren. What happens in the next 12 months is that we’re going to add 1.4 million to 1.6 million jobs, and that will fill empty desks. And the next 2.2 million jobs will come in 2005, and that’s when you’ll finally see real absorption taking place.”

But most of us have assumed you cannot have economic recovery without creating jobs.

Says Linneman in reply, “They’re wrong. You have a hard time getting office space absorbed without jobs, but that’s different than saying the economy can’t move forward. For instance, you may not have any more office jobs, but you have a lot more warehouse space being used because people are buying more.”

But what about outsourcing? The more we hear of that, the more concerned we are about office space demand locally. Isn’t outsourcing bad for the economy and, therefore, demand for office space?

“Someone asked me recently if I was worried about the call-center jobs we might lose,” says Linneman. “My answer was that 10 years ago we didn’t even know what a call-center job was. Here’s a whole sector that 15 years ago didn’t exist — and we lacked the imagination to see that it could exist. Now we lack the imagination to think there’ll be something better beyond it.”

Clearly, then, we must look more broadly than just job creation among our major local employers to determine where office demand is going. If Professor Linneman is right, it takes the combination of demand for more employees and sustained profitability for businesses to move toward adding staff.

To predict where office demand is going locally, then, we need to examine biotech, aerospace and some of our other major employers in this broader context. It’s worth not only asking if they are hiring, in other words, but also taking a peek at their quarterly financial reports to see if they’ve sustained more than a year of profitability.

As Linneman points out, just because they’re crowded doesn’t mean they’re ready to lease more space.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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