The past decade is firmly established in the record books as the period in time that experienced the greatest number of jobs created in the United States: from 2010 to 2020 there were 22.6 million jobs added. December’s 2019 jobs report was the 111th consecutive monthly tally to record employment gains, and the U.S. economy ended the decade with a record 152.4 million people working – all of which helped fuel substantial advancement in the office sector.
That job growth continued into the first few months of 2020 when employment rose by 273,000 jobs in February 2020. The U.S. Bureau of Labor Statistics reported the unemployment rate remained at 3.5%, a 50-year low. Yet, as the threat of the COVID-19 expanded in March, the future of the U.S. economy and its jobs market clouded over. Much uncertainty and stock market volatility changed the situation virtually overnight.
Economists had been predicting that jobs seemed sustained and given the strong market fundamentals, they didn’t foresee a recession on the horizon. That appeared to bode well for the commercial real estate office market, which was humming along smoothly prior to the emergence of the threat from COVID-19.
That extended economic recovery from the 2008 Great Recession was a testament of what could be achieved. The U.S. was in the 11th year of expansion and experts noted there was no inflation, no over-building or over-leveraging. The positive fundamentals appeared to provide a big cushion should the market turn. The office market sector experienced tremendous increase from 2010 to 2020, and there was immense optimism that the trend would continue.
Now, the big question to be answered in the coming months will be how will commercial real estate markets and assets weather the coronavirus storm? A look back at the economic recovery period since the last major recession reveals a host of interesting CRE statistics that can be used as a backdrop for what is possible. This includes a focus on new construction, net absorption, lease rates and sales across the key West Coast office markets between 2010 and 2020.
Seattle Office Overview
Office inventory grew 18% in Seattle from 2010 to 2020. That included more than 31.6 million square feet of new construction, which boosted the base to more than 206.5 million square feet of space. The tech boom largely fueled the expansion with Amazon leading the way, though other companies like Apple, Facebook and even WeWork, were also major contributors. Seattle experienced more than 33 million square feet of net absorption during the 10-year period and the market’s occupancy rose 19%. That strong demand drove up office rents 53% and sales prices 121%, over the past decade.
Bay Area Office Overview
The Bay Area’s four office submarkets experienced a 16% combined increase in inventory over the past decade. New construction resulted in the addition of 43.7 million square feet, expanding the base to more than 320 million square feet of space. The Bay Area’s four key submarkets experienced a 19% increase in occupancy over the decade, as well. Much of this being directly connected to the high amount of Venture Capital being pumped into the tech industry.
Inventory grew 29% in the Silicon Valley, 11% in the Peninsula/San Mateo market, 9% in San Francisco and 7% in Oakland/East Bay from 2010 to 2020. The Silicon Valley’s office base added 27.7 million square feet to boost total inventory to more than 120 million square feet there. San Francisco’s base added 9.3 million square feet to 112.3 million, though supply in the market was limited by development restrictions, despite high demand.
The Silicon Valley experienced more than 29.6 million square feet of net absorption during the 10-year period, and San Francisco captured more than 14.5 million square feet of net absorption.
All four of the Bay Area’s submarkets experienced triple-digit rent and sales price increases. Leading the way for lease rate growth over the past decade was San Francisco, which recorded a 148% increase. The Peninsula/San Mateo market experienced a 135% increase, followed by Silicon Valley (124%) and Oakland/East Bay (118%). San Francisco also topped the list, reporting a 246% increase, followed by Peninsula/San Mateo (178%), Silicon Valley (155%) and Oakland/East Bay (83%).
Southern California Office Overview
Los Angeles office inventory grew by 4% over the past decade, adding 15.6 million square feet, bringing the market’s total to more than 370 million square feet. Net absorption only increased 2%, but rents jumped 41% and sales prices grew 117% from 2010 to 2020. Interestingly, there was roughly 12 million square feet of space that was repurposed to office uses.
Orange County experienced a 6% rise in inventory with 8.2 million square feet of new office space delivered over the decade. Net absorption totaled more than 11.2 million square feet, representing an 8% change in occupancy. Lease rates increased 28% and sales prices grew 44% from 2010 to 2020.
The San Diego market added 7.7 million square feet of new office supply over the past decade, boosting inventory 8% to a total of 103.9 million square feet. Net absorption totaled nearly 9.6 million square feet, a 10% change over the decade. Rents in San Diego grew 23% and sales prices jumped 96% from 2010 to 2020.
Phoenix Office Market Overview
The Phoenix office market experienced a 12% inventory growth, adding more than 18.1 million square feet of new construction over the 10-year period. The market absorbed 25.8 million square feet of office space, while reporting a 17% increase in rents and 61% change in sales prices. Phoenix’s growth, especially in the back-office occupier sector, could be attributed to the tax advantages it offers compared to neighboring California.
The last decade has been an extraordinary period for our industry. Looking ahead and given today’s uncertainty, commercial real estate industry leaders advise waiting until the facts unfold to determine the scope of the situation. They caution against making fear-based reactions without valid information. As the coming weeks unfold, investors, owners and managers will gain a clearer picture of market, in order to adopt the best strategy to mitigate risk and prepare their real estate assets for the future.