In the coming decade, office building construction in the United States may drop by as much as 90 percent from its 1980s levels, according to a new study, and the decline could have broad social, economic, environmental and political implications.
A similar decline in office construction demand is projected for the Washington area, according to the job-growth study's authors, who nonetheless said they considered this area one of the strongest in the country.
The study, commissioned by the National Association of Industrial and Office Parks (NAIOP), received a mixed reaction initially from real estate and demographics experts. Although all agreed that an office construction slowdown is well underway and will continue for the next few years, there was disagreement about the magnitude projected by the NAIOP study.
The study noted that job growth nationwide will slow dramatically in the next decade, creating far less demand for new office space than was needed in the booming 1970s and 1980s.
At the same time, overbuilding in most of the nation's major metropolitan areas -- driven by a frenzied rush of capital into the market through much of the decade -- has left a considerable number of vacant or partially occupied buildings that must be occupied before new construction can begin again, the study found.
The falloff will be dramatic because the 1980s represented such an incredible surge in development activity: According to the study, the country nearly doubled its total supply of office space in one 10-year period. The new construction included some 2.1 billion square feet of top-grade office space, the study said -- or an amount equivalent to adding more than three New York Cities, 14 Bostons or 28 Seattles.
"Under even the best scenario, the message for the 1990s is more than clear: The boom is past," said the study's authors, from the Massachusetts Institute of Technology and Cognetics Inc., a Cambridge, Mass.-based marketing and consulting company.
The sharp decline may cause some wrenching changes in the American economy, according to real estate experts interviewed about the study. Real estate-related employment will be affected, tax revenue will drop and charitable gifts and political contributions will diminish as real estate development income falls, they said.
On the other hand, they said, the slowdown in development will reduce pressure on environmentally sensitive areas and give communities the opportunity to play catch-up, building such essentials as roads and schools.
The NAIOP study examined potential job growth in the next decade, and found that it is likely to slow sharply because of fundamental economic and social changes. The baby boom generation has fully entered the work force, the surge of women into the job market has slowed, older workers are retiring earlier and the shift from manufacturing to service employment has peaked, the authors said. Consequently, the average annual growth rate of the labor force will drop from nearly 2.5 percent in 1980 to about 1 percent in the year 2000, the study said.
A slowing growth in the work force means a slowing in demand for new office space, the authors said. If economic conditions are very favorable -- if immigration is high, new technologies create dramatic job growth or elderly people remain in the work force longer -- the need for newly built office space may fall only 65 percent in the 1990s from the 1980s, the study said. But if more conservative assumptions hold true, demand for office construction could fall by 90 percent, it said.
Richard Kateley, who heads the Chicago-based Real Estate Research Corp., called the study's numbers "right on target," while Norman D. Flynn, president of the National Association of Realtors, called the figures "speculative at best," given the vagaries of technological change and migration patterns.
Richard Groner, chief of labor market information for the District government, said he found the prediction of a 327,000 increase in the Washington, D.C., area work force -- about half the level of the 1980s -- somewhat "pessimistic."
And one of the study's authors, David Birch of MIT, said the obsolesence rate for buildings is still an unknown factor. In particular, he said, many buildings may need to be renovated or even replaced if they cannot accommodate the wiring necessary for modern telecommunications equipment. On the other hand, he said, the vast majority of the country's office buildings are new and modern.
Regardless of the ultimate magnitude of the slowdown, however, all agreed that major changes are in store for the real estate industry. Birch said that about 5 percent of all Americans are employed in the construction industry, and other studies have estimated that about one-fifth of all American workers' livelihoods are somehow linked to real estate, either through sales, property management, lending or the manufacture and supply of construction-related goods and services.
It may take some time for the slowdown to work its way through the economy because of the lag time from the start of a project to its completion, they said. Once the projects underway are completed, however, workers are laid off and regional spending slows.
SURVEY OF U.S. OFFICE SPACE SUPPLY, BY MARKET
12% - Percent of markets with less than 5 years' supply
34% - Percent of markets with 5-9 years' supply
54% - Percent of markets with more than 10 years' supply
SOURCE Cognetics, Inc.