As the actual end of summer draws near, positive indicators are beginning to point to an end to this historic and global recession.
The stock market has rallied more than 40 percent from a March low, the housing market is in the early stages of recovery, and the national economy is poised to resume growth in the second half of the year. Recently the Federal Reserve reported that the economy is “leveling out,” its most bullish assessment in nearly a year. This positive news is fueling recent optimism that the economy has hit bottom and is poised for a rebound in the second half of 2009.
Stability and transparency in the financial markets is an essential first step on the road to economic recovery. If 2009 ends on a positive note, consumers and business alike should feel a renewed sense of confidence heading into 2010.
Some encouraging signs are finally starting to emerge from the struggling employment sector. National and local indicators have revealed that the pace of year-over-year job losses is slowing. While employment loses will continue through the end 2009, it is now clear that the intensity of the losses peaked back in April. With the worst behind us, economic activity will soon start to spur growth opportunities.
Employment growth, which heavily influences office demand, is likely to follow albeit at a slower pace. The New England Economic Partnership reported in May that the Massachusetts is expected to see employment growth resume at a faster rate once recovery begins. This is due to the conservative hiring practices during the last expansion from 2004-2007. Employers will need to quickly refill lost positions once recovery begins.
Tenants Awaken
Despite industry-wide acknowledgement that the current leasing environment is largely in favor of the tenant, many occupiers have just begun to take advantage of significantly lower rents and generous landlord concessions. This situation is predominately due to two key factors. Six months ago, tenants had no sense of when the economic freefall would end and employment losses would start to slow. Tenants became anxious. Many uncertain of their own future opted to postpone capital-intensive real estate decisions as long as possible.
Improving conditions over the last several weeks indicate that the bottom is set and a recovery is on the horizon. Tenants will begin to grow more optimistic about their financial health and open to pursuing real estate solutions. Pending lease expirations will also motivate some reluctant tenants, who have been on the sidelines, to act. This change in mind set, combined with lower rental rates, will create more velocity in the market. As a result, we anticipate greater leasing activity in the next several months and into 2010 as companies reassess staffing and business plans.
Although the past few months have provided the first signs that the recession is easing its vice grip on the global economy, the road to recovery will likely be long and at times unsteady. Office market fundamentals, which lag the overall economy, will likely remain weak overall. Tenants with the greatest negotiating power are investment grade companies looking for long-term leases. Landlords, seeking to lease up existing vacancies, will avoid the added risk associated with companies showing signs of questionable credit.
Tenants have adopted a “flight to responsibility” attitude, with a continued focus on limiting capital expenses and reduced occupancy costs. This will result in users heavily favoring renewal versus relocations. However, after playing a waiting game for most of 2008, tenants and landlords are slowly starting to work together again.
