Monday, July 19, 2010

Office Buildings Are So 1997

Last week, I posted a link to a story showing Port of LA cargo traffic is at record highs. At the same time, the office market is still getting worse, with vacancies in the LA-Orange-Inland Empire region pushing 20%.

The Los Angeles CSA (LA, Orange, Inland Empire), has lost 1.7% of its jobs over the last 12 months, but 3% of its office space has been vacated over that same period. Moreover, in Orange County, vacancies are still rising while employment in business and professional services has actually started going up again. Office space leases aren't just lagging, they're contracting at a time when data centers, hospitals, schools, and other workplaces of the 21st century are expanding.

I cover the data center industry in my consulting business, and the industry is adding new capacity as we speak. Unlike the office REITs, data center REITs are seeing double digit annual growth in rent revenue.

Few offices are likely to be needed this decade in the massive Southern California market. Vacancies fell 10 points in the 90s economic expansion, and 7 points in the 2000s expansion. Even in the most optimistic scenario, it is very hard to see overall vacancies in the market dropping below 10% this decade. But this does not mean jobs will not be created, just that they won't be done in the 20th century workplace known as an office building.

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