Office building vacancies throughout the United States will rise steadily for the rest of the decade, hitting historic highs, as employers accommodate additional workers in their present quarters rather than leasing new offices, according to a study just released by the Massachusetts Institute of Technology.
Construction of new buildings is expected to continue, despite the growing glut of space, encouraged by generous tax shelters and the strong economic recovery of the last two years, said the study, prepared by Professors William C. Wheaton and Raymond G. Torto for MIT's Center for Real Estate Development. Wheaton and Torto forecast growth of the office vacancy rate from the present national average of about 17 percent to nearly 19 percent by 1989.
The Washington area, however, is an exception to the national rule. "Washington is one of those areas that is going to improve," Torto said in an interview. He predicted the area's current vacancy rate will hold steady this year and in early 1986, but will decline slowly after the middle of next year. In addition, construction is expected to start slowing down next year, Torto said.
The downtown Washington vacancy rate was 10.4 percent and the suburban rate was 11.8 percent at the end of 1984, according to Coldwell Banker Commercial Real Estate Services. The suburban rate could climb steeply in coming months, particularly in Northern Virginia, the most overbuilt suburban area. About 10 million square feet of office space is available now in the Virginia suburbs, and "developers presently have plans for an additional 30 million square feet of new office construction," according to the Jackson-Cross Co.
In the rest of the nation, slower growth in the labor force and construction of more and more office buildings will result in a saturated market, according to the MIT study. Slowing of the growth in the number of workers will occur as a reflection of the baby bust -- the drop in the U.S. birthrate that came after the post-World War II baby boom. By the year 2000 the first baby boomers will be entering their 50s, and beginning to think about retirement, according to Torto. He said demographers also are predicting more early retirements in coming years.
By a saturated market, "we mean that office space per employe is so generous that considerable growth can be accommodated through 'internal absorption' rather than leasing more space," the authors said. "At this point, the net absorption of space" -- the net change in total leased space -- "will slow, and this is a point that the market has already started to reach."
In past cycles, office construction dropped off when vacancy rates began rising, but this is not happening now. "A question of considerable importance, then," is why construction is continuing at such a brisk pace and is not expected to slow down soon, the study said.
Answering their own question, Wheaton and Torto wrote that a "partial reason . . . involves the short duration of the just past recession and the extremely strong recovery of 1983-84." The growth in employment and new leases signed has been stronger than in recoveries following the previous two recessions, encouraging new development, they said.
"At the same time we feel that the recent tax shelter attractiveness of real estate, in conjunction with the strong dollar, and the diversification of pension funds into real estate investments has created an unusually strong interest" among investors.
The glut of office space impending, or already present, in many of the nation's metropolitan areas will lead to lower rents and, in turn, to a decline in "the economic attractiveness of office buildings and their long-run appreciation potential," according to the study.
And if the soft market doesn't send investors elsewhere, the tax reformers might. Several proposed changes in federal tax laws would remove many of the tax shelters investors in real estate now enjoy, said a commercial leasing executive.
J. McDonald Williams, managing partner of the Trammell Crow Co., the nation's largest real estate development firm, said of the MIT findings, "They're right."
In addition to the tax incentives, which he said are generating "too many tax-driven investments," he pointed to deregulation of the thrift industry as an important factor in current overbuilding. "In our area, the Southwest, they've gone bonkers," putting large sums into very marginal projects, he said.
He agreed that the expanding economy has created substantial demand for office space, but as is "typical in our industry, we've gone too far."
Commercial leasing specialists in Washington agree with the MIT researchers that the metropolitan area's office market will remain healthier than those in many areas of the country because of the "great safety cushion" the federal government's presence provides, as one described it.
"Every time the government changes a regulation, a whole new bunch of folks show up," said C. Duke Brannock, chairman of the Jackson Cross Co. Most come as lobbyists, lawyers and other representatives for industry and special-interest groups affected by federal decisions.
The area will not escape entirely the forces driving up vacancy rates in the rest of the country, however.
"We are already seeing firms decrease their allocation of space to employes . . . because of the high cost of occupancy," said Julian J. Studley Inc. Vice President Lois A. Zambo. Two major trade associations, the American Petroleum Institute and the Association of American Railroads, recently moved into new offices approximately the same size as those they vacated, although their employes are growing in number, she said.
Another factor pointing toward use of less office space "has to do with high technology," Zambo said. "People don't need huge file cabinets and huge computer space," as computers get smaller in size while storing more of the information that used to be kept in filing cabinets.
The growing computerization of offices also means that some employes can work at home and other, "back-of-the-house" workers such as bookkeepers and other clerical staff members can work in cheaper quarters in suburbs or outside metropolitan areas entirely, said Justin Hinders, a Washington commercial leasing broker.
Hinders and some other Washington brokers said many companies will not reduce the amount of office space per person, however, because space is often considered an employe benefit or status symbol. Factors such as title, pay and seniority dictate the amount of office space an employe occupies.
"We don't see law firms, accounting firms and others to be able to reduce the space per person," said Vernon E. Knarr of Coldwell Banker. A law firm that cut back on space, for example, "would not attract good people."
MIT study author Torto agreed that "a prestigious law firm will not squeeze partners into less space." He said companies in many metropolitan areas, especially cities with an oversupply of space, took advantage of low rents and other favorable terms to lease more space than they needed at the time, thus giving themselves plenty of room to grow.