Commercial real estate experts are perplexed.
The office market in the United States averaged just 4.4 million square feet of positive net absorption in the last quarter of 2017 and the first quarter of this year, way less than the 10.8 million square-foot quarter average forecast six months ago, according to a report released this month by the NAIOP Research Foundation.
If just looking at the first quarter of 2018, the numbers are even more bleak, just 1.3 million square feet was leased on a net basis.
Researchers Hany Guirguis, of Manhattan College, and Josh Harris, of New York University, said that's "a significant conundrum" since the indicators used to forecast absorption performed at or above expectations. Those indicators included the purchasing managers index and a measure of CEO confidence.
Other macroeconomic factors also continued to grow, such as the employment of people in offices. In short, office employees were added but office space wasn't.
While the numbers could be a one-time anomaly, they could also signal a significant shift in the office market, researchers said.
"Every imaginable economic variable that we have both tested for research and anecdotal common sense tells you, you should predict more absorption of office space," Harris said in an interview. "It's not being seen in the data. You are seeing very low rates of absorption. … There's something going on. 'Is this something that's temporary or something more long-term?' That's the big thing that we are wrestling with."
Part of the explanation may be that companies are becoming more efficient with how they use space, allowing more employees to work from home and using co-working and shared office spaces that are more dense than traditional offices, Harris said. Even large companies are starting to use co-working spaces like WeWork, he said.
However, there may also be a limit for just how much efficiency can be squeezed out of tighter spaces and how much companies can rely on off-site working arrangements before they find them counter productive, Harris said.
"This has happened before … per square foot employee utilization goes down like it is and then it has a breaking point and expands back out," Harris said.
When a company is growing fast, it will likely need to make sure it has vacant space so it has the ability to quickly expand. "There comes a point where you just cannot function," Harris said.
It's also possible that the unfamiliarity with the new federal tax law and uncertainty over the effect of trade wars may have also led some employers to delay expansion plans. Because of the low absorption, the forecast for the remaining three quarters of the year has been reduced to an average of 8.4 million square feet per quarter. The first quarter of next year is forecast to improve to 10 million square feet per quarter.
Developers looking to build new speculative office space without already signed tenants should be cautious, the report notes. On the positive side, if there is another economic downturn there shouldn't be a lot of excess space that will need to be vacated.