Because of a production error, the scheduled release dates of economic indicators for this week were incorrect in Washington Business yesterday. The indicators due this week include factory orders for December on Wednesday, business productivity for December Thursday and January unemployment figures Friday. (Published 2/2/88)
It's the time of year when economic forecasters peer into their crystal balls and preview the performance of leading indicators. In the Washington area, probably no forecasts are as eagerly awaited as those pertaining to the real estate industry, a key measure of the local economy.
More than 400 industry executives, lenders and accountants appeared to confirm that last week when they showed up at the Capital Hilton for Smithy Braedon Co.'s second annual commercial real estate forecast. They came primed to hear a wide-ranging presentation, but the forum undoubtedly drew the biggest response from those who sought assurances that activity in the market will continue at the extraordinary pace of the past five years.
Others came seeking answers to lingering questions about overbuilding, high vacancy levels, rising interest rates and commitments from lenders.
Everyone, however, obviously wanted to hear numbers delineating millions of square feet of new construction, rental rates, occupancy levels, mortgage rates and concessions on rental rates. And they got numbers -- lots of them: Treasury bill rates, equity participation figures, the number of square feet to be completed this year, the number of new construction starts planned, the spread between Treasury bill rates and mortgage rates.
Above all, those attending the Smithy Braedon affair heard a bullish forecast for 1988, a few caveats notwithstanding.
When the numbers are totaled, the result shows the Washington area will lead the international office construction market again in 1988. And the office market here will be as good as in 1987, if not slightly better, according to the Smithy Braedon forecast.
There'll be some "soft spots" -- polite jargon for a lot of empty space in some area submarkets. But what matters most is Smithy Braedon's forecast of continued strong demand for so-called first-class office space.
There are more than 18 million square feet of empty office space in the area. And the vacancy rate for the entire Washington area is between 13 percent and 14 percent. In Northern Virginia and suburban Maryland, the range is 15 percent to 17 percent, compared to about 10 percent in the District. It would take 18 to 24 months to absorb the available office space in Tysons Corner, according to one estimate.
Not to worry. The General Services Administration alone will need more than 3 million square feet of new office space this year.
Meanwhile, construction of new space continues at staggering levels. More than 72 million square feet have been completed since 1981. More than 17 million square feet are being constructed for completion between now and 1990. Incredibly, 150 new office buildings will be started in the area this year. Developers this year will also construct about 2 million square feet of "flex space," which can be used either for offices or research and development.
In most metropolitan areas, those totals might be cause for apprehension in the real estate industry. But the Washington area and the New York City area boast the two hottest commercial real estate markets in the nation. More than 14 million square feet of office space was built here in 1987, but tenants absorbed 12 million square feet. "There won't be much of a falloff" from that level in 1988, Smithy Braedon's chairman, Edmund B. Cronin Jr., predicted in an interview prior to last week's forecast.
"Current market conditions indicate that the Washington metropolitan area as a whole will be every bit as healthy in 1988 as it was in 1987, with absorption of approximately 12 million square feet," Smithy Braedon concluded in its forecast.
A major shift in the national economy obviously could alter that bullish outlook. The Oct. 19 stock market crash has had no material effect on the local office market, according to Smithy Braedon's president, James L. Eichberg, but a rise in interest rates would. "Capital markets are global and politicians will not be able to keep rates low until the election in November," the Smithy Braedon forecast warned.
In another note of caution, the real estate services firm advised industry executives that most lenders making immediate commitments will require "at least break-even leasing, and many will want 90 to 95 percent occupancy."
Warnings aside, the numbers in Smithy Braedon's forecast tend to add up to a rerun of last year's strong performance in the local real estate market. But Smithy Braedon has some reservations that warrant serious consideration by the real estate industry. Ignoring them could render the numbers useless in the long run.
Consider the plans to start construction on 150 office buildings this year. "It is essential to our market that some of those start dates be reevaluated and postponed," Eichberg cautioned.
Only the blindly optimistic and the naive could miss the implication of that. Most experts agree with Smithy Braedon that at current vacancy levels, the office market here doesn't have a glut of space. On the other hand, overbuilding -- adding space at a rate faster than normal absorption levels of 12 million to 13 million square feet annually -- could cause serious problems in the industry.
Smithy Braedon's candor in suggesting postponement of the start of some office projects is responsible and refreshing. Indeed, the candor exhibited by the real estate services firm in focusing attention on potential problems in the local office market may have been the highlight of its forecast, notwithstanding a decidedly bullish outlook.
Consider the following remarks made by Eichberg at Smithy Braedon's presentation:
"Transportation and affordable housing must be addressed if this marketplace is to remain a viable, active and progressive one. It is oftentimes short-sighted to talk about vacancy and projected vacancies in submarkets. For the most part, vacancy is a short-term concern, especially in markets as active as ours.
"But the issues of transportation and housing will have profound and long-lasting effects on our local economy and on growth in the commercial real estate market in particular. ... Projects and entire submarkets could be literally choked by transportation problems," Eichberg warned as he called for regional cooperation to develop solutions.
At the same time, Eichberg said, "If we hope to continue to attract new businesses to the area, we must provide affordable housing for employees at every level."
Continued growth in the area's local economy, and the office market in particular, will depend to some degree on how well real estate professionals and others factor in Eichberg's challenge with all those numbers they digested.