‘As Go Services, So Goes the Economy’

MBA (6/3/2008 ) Murray, Michael
The services sector maintains steady employment and keep office property occupancies level despite an economic shift of manufacturing jobs moving overseas.

“It’s a shift in the economy where the manufacturing jobs are literally going abroad,” said Umair Shams, economist at CBRE/Torto Wheaton Research, Boston. “Most are probably not coming back.”

Shams said economic dependency on the services sector—accounting and bookkeeping, computer design, management and technical consulting, engineering, legal and architectural services and other services-based professions—could translate into better office occupancy rates overall and better employment numbers, despite some fallout from the financial sector.

CBRE/TWR said it expects negative absorption and higher office vacancy rates for the remainder of the year following tenant demand declines in the last few quarters because of the overall downturn in the economy—particularly in the financial sector.

However, in a CBRE/TWR report authored by Shams, Services to the Rescue, he said many of the unprofitable technology-oriented eCommerce and services firms from the 2001 recession are now "well positioned" to absorb the housing-led economic slowdown.

"In fact, had it not been for the healthy profits of service sector firms, the GDP numbers for the first quarter might have been negative," the report said. "We are in a much better position today than in 2001, when office-using service jobs were lost and rents declined sharply. As service sector employment has remained positive, it has allowed office rents to increase even as economic headwinds have plagued other sectors, notably residential construction and financial services."

The report added that evidence suggests because of the recent strength in office-using services and future prospects, the top rent growth markets will be the ones that have high concentrations of business services and information employers.

“Because office leases tend to be relatively long-term, properties can be a bit insulated from short-term ups and downs in services sector employment,” said Jamie Woodwell, senior director of commercial/multifamily at the Mortgage Bankers Association. “That being said, when the services sector slows, so does leasing activity; and when the sector picks back up, leasing tends to follow. Given the important role of services in the U.S. economy, there’s a bit of a trend that ‘as go services, so goes the economy.’”

Shams said that in the near term—in the top 10 markets that will outperform the rest of the office markets—those markets will tend to have a dependency on service sectors.

“Services have helped so far in this downturn, and we do expect them to continue to help in the future as well,” Shams said. “It comes down to the fundamentals—the vacancy rates.”