According to conventional wisdom, it will take developers in metropolitan Washington several years to dig out from under the huge oversupply of office space they piled up in the waning days of the 1980s. Many contend, in fact, that the local market may not achieve a balance before the year 2000.
Two recent studies contain a more optimistic outlook, suggesting that so-called equilibrium, or a respectable office vacancy rate of 6 percent or less, can be attained before then. That may be possible, but the odds are staggering and a lot of people are paying a heavy price now for blind optimism.
The area's office market stumbled through its third consecutive annual decline in leasing activity in 1990, according to Thomas G. Owens, senior vice president in the Washington offices of Spaulding & Slye Colliers, a real estate services firm. "As business continues to retrench in these difficult economic times, one can expect absorption rates to drop again in 1991," Owens noted in Spaulding & Slye's January report on commercial real estate trends.
There's hardly any other conclusion one can reach under the circumstances. The overall office vacancy total for the Washington area is more than 38 million square feet. The vacancy rate in Northern Virginia is 21 percent. It's 18 percent in Montgomery County and 19 percent in Prince George's County. Even the District has moved into the double-digit class with a 10 percent vacancy rate.
A summary of conditions in Northern Virginia by Joseph B. Brennan, a Spaulding & Slye associate, pretty much tells the story found in conventional wisdom these days: "Northern Virginia has 21 million square feet of speculative office space available for lease," Brennan noted in his company's latest industry report. "At an optimistic absorption level of 5 million square feet per year, the numbers are quite clear. Northern Virginia currently has a four-year supply of existing office space still available."
At a recent luncheon sponsored by Commercial Real Estate Women-Washington, someone asked how soon we should expect to see a turnaround in the market. The answer, of course, is that no one really knows. Several forecasters have taken a look at the numbers -- square feet available, amount under construction, demand, labor force, absorption, market size, rental costs -- and have come up with some interesting scenarios for the short and long terms. In the final analysis, however, no one can say with any certainty what's likely to happen until lending institutions indicate they're stable again and prospective tenants begin to demonstrate confidence in the nation's economy.
In the meantime, however, the real estate services firm of Hammer, Siler, George Associates is forecasting that 88 million square feet of office space will be leased in the 1990s in the Washington region. Although its president, Vernon George, doubts construction and absorption will ever approach 1980s' levels, he maintains: "Once some of the current inventory is absorbed, which is likely to be concurrent with an improved economy and lending institutions rediscovering real estate, development will again be a strong force in the region."
Even under his most optimistic scenario, George concedes it's likely to be 1994 before the overall vacancy rate in the region drops even to 10 percent. Although that would mean an absorption rate of half the total for the previous five years, George believes it will provide "sufficient market balance to generate new development opportunities."
A more fascinating approach to the question of what we can expect in the way of demand for office space is found in a study by Christine Chmura, an economist at Crestar Financial Corp., the Richmond-based bank holding company.
Chmura estimates there will be only about 21 million square feet of empty space on the market in 1991. Chmura further says it's possible for the market to return to equilibrium by the end of 1992 or mid-1993. She bases her conclusions on estimates of job growth in the area, the assumption that there will be a healthy vacancy rate of 6 percent and estimates that 1 percent of the total office space becomes obsolete each year. Chmura's calculations are based further on a finding that an office worker occupies, on average, 280 square feet.
Thus, about 75,000 office jobs will be needed to fill 21 million square feet, according to Chmura. Depending on the rate of job growth and employment projections, it's likely, she says, that 117,000 jobs will be added to the local economy over a two-year period, beginning in 1992. "Given a lead time of a year, on average, to construct offices, these data suggest that office starts could begin to pick up in early 1992," Chmura concluded in an assessment of construction activity in the Washington region.
All of this depends, of course, on demand and actual job growth over the next four to five years. The key words, then, are "demand," "possible" and "employment projections."
George, meanwhile, maintains that prospects are bright for those developers who can wait out the glut. His forecast calling for 88 million square feet of space to be leased in the 1990s is more than three times the amount that will be needed, according to a major national study prepared late last year for the National Association of Industrial and Office Parks (NAIOP).
The NAIOP study, by David Birch, president of Cognetics Inc., a Cambridge, Mass., marketing consulting firm, found that only 29 million square feet of office space will be needed in the Washington area by the year 2000.
The boom is over, Birch contends, to the consternation of many in the real estate industry. "The slower pace of growth that will characterize the next decade will also continue to well into the 21st Century," he asserts in the NAIOP study. "Yet, convinced that the boom would continue well into the 1990s, overzealous developers and investors have burdened many markets with supplies of office space that are far in excess of short-term need."
George isn't buying any of it. He believes the willingness of the labor force to migrate to higher paying jobs and the region's economic diversification and growth potential will prove him correct in forecasting a need for 88 million square feet in this decade.
Funny, that's what developers were saying before they created the glut of 38 million square feet in a market that was already slowing down.