As we enter a 2010 that, with any luck, will be kinder than 2009 for commercial real estate, we also look forward to the decennial census. The results of the census will provide valuable insight on population and migration trends in the United States, which will be very useful for government agencies. The information is also of interest to commercial property investors and office investors in particular; demand for office space in metropolitan areas is driven by employment growth, which is in turn driven by economic and population growth.
It's almost certain that the U.S. job market will actually lose more jobs than it created this decade, something that has never happened since the collection of such data began. Due to the residential real estate bubble and the resulting financial crisis, office employment has been hit extremely hard in this recession. Still, some regions have fared better than others in terms of economic and office-job growth. Real estate investors can look at these disparities carefully when considering investment and diversification strategies for the coming decade.
Some of the best-performing office markets during the last 10 years include those in the CANVFLAZ (California, Nevada, Florida and Arizona) area. For most of this decade, these markets relied heavily on their overbuilt and overpriced housing sectors for economic growth and are now painfully adjusting to the housing correction taking place. So although the job growth figures of some of those best performers are attractive, one has to question the sustainability of job growth before investing in these regions. Areas like Austin and San Antonio have done well this decade due to more dependable economic fundamentals. High-tech and service firms in both of these markets have been key employers of office-occupying workers during the last decade; we expect that trend to continue in the long term as global demand for technology and software products rebounds after the recession. Toledo, Detroit and Cleveland lead the way among the worst-performing office markets; all three face a long-term structural shift away from manufacturing and continuing worker migration away from their respective metropolitan areas.
As we look toward a new decade after the worst recession since the Great Depression, it is important to remember that U.S. job growth over the last 10 years has been almost non-existent. Ironically, it was some of the housing-led economies that saw the strongest office job growth, but investors should be careful before investing there as those economies are faced with the arduous task of repairing structural imbalances created by the housing bubble—something that traditionally takes time to correct. On the other hand, there might be some good opportunities in markets that lost office jobs over the last 10 years but might be well-positioned to benefit from the global turnaround, thanks to their local industry profiles.
— Umair Shams is an economist with CB Richard Ellis Econometric Advisors in Boston.