Economic Trends
Edited by Peter Coy
Office Space: A Nasty Hangover
After a binge, companies cut back
In an ordinary commercial real estate slump, vacancy rates rise because construction of new space outpaces the market's ability to absorb it. Even in tough times, the amount of occupied office space usually rises at least a little each year. But this is no ordinary slump. Office space is actually emptying out. So far this year companies have retreated from 40 million square feet of office space, which they are trying to sublet, according to real estate broker Grubb & Ellis Co. in Northbrook, Ill. Also, 15 million sq. ft. less office space is occupied because of damage to the World Trade Center area. A nationwide decrease in occupied space "didn't even happen in the last recession," says Robert Bach, Grubb & Ellis national director of market analysis.
The oversupply problem started in 2000, when companies rented more space than they needed. In an average year, rented office space should expand at the same rate as employment, according to Ross J. Moore, national director of research at Boston-based broker Colliers International. In 2000, job growth was just under 2.5%, but companies occupied an additional 140 million sq. ft. of space by Colliers' reckoning--a 6% increase.
Now, companies are shedding extra space with a vengeance. They have not only vacated all the extra space they rented in 2000 but will probably cut back an additional 30 million sq. ft. in the next two quarters, predicts Moore. Bach estimates that the vacancy rate could rise from its current 13% to as much as 18% a year from now. That's what it reached in the recession of the early 1990s.
There is a bright side to the aggressive cutting. "These companies are much leaner now and don't have any extra [real estate] inventory," says Moore. As they resume hiring, they'll be forced to occupy space they're currently trying to sublet, and vacancy rates could drop rapidly. So the market is likely to get back to normal in much less time than the six years it took to recover from the last recession.
EC Austerity Is Backfiring
Euro zone rules are stifling recovery
The euro zone slump is causing tax receipts to plunge and budget deficits to surge. Economists predict that the 12 countries that share the euro will spend $120 billion more than their income next year. That's 2% of gross domestic product--way beyond the 0.3% shortfall that governments forecast when they set out their medium-term fiscal objectives a year ago. Several countries--notably recession-bound Germany--will be lucky to keep their deficits below the 3% ceiling laid down in the 1997 Stability & Growth Pact. The pact required European Union members to balance their budgets over a four-year period--meaning a deficit in one year has to be balanced by a surplus in another. "Like other governments, we based our projections on the expectation of solid economic growth," says a Finance Ministry spokesman in Berlin.
Instead, Germany got a sudden and severe slowdown--just as its neighbors did. Economists now predict that the euro zone economy will grow just 0.6% next year, compared with the European Commission's original estimate of 3%. Thomas Mayer, chief economist at Goldman, Sachs & Co. in Frankfurt, calculates that each 1% shortfall in GDP growth boosts the cumulative euro zone budget deficit by around 0.5% of GDP.
Because of the Stability Pact, governments don't have much room to stimulate demand by cutting taxes or boosting state spending. In fact, they are obliged to pursue policies that exacerbate the business cycle, injecting more money into the economy when it is growing and less when it slows.
Things won't change for the better very soon. On Nov. 21, senior European Central Bank officials hinted that they would tolerate a loosening of the Stability Pact next year if the economic situation deteriorated much further. But that will be too late to ease the current downturn. Germany, France, and their European partners are finding that financial rigor may not be as beneficial as they had hoped.
Venture Capital's Turning Point?
VC outlays may have bottomed out
A hallmark of the newly christened recession has been a plunge in venture-capital spending. VentureWire, a unit of New York tech publisher Technologic Partners, says venture investments in private U.S. companies fell more than two-thirds over the past year.
The question now: Has VC funding finally hit bottom? There are some signs that it has. VentureWire calculates an index of venture outlays based on the previous 90 days of announced deals. The index, which has been dropping since July, 2000, leveled off in November (although the dearth of deals over Thanksgiving caused it to drop again when calculated on Nov. 26 and 27).
The rebound in the stock market may account for the leveling off. With the Nasdaq Composite Index up about one-third from its post-September 11 low, venture capitalists could be regaining confidence that there will be a market for tech-stock initial public offerings.
Still, the VC market is far from healthy. Halfway through the fourth quarter, seed money and first-round financing accounts for just 12% of all disbursements, down from 25% in the first quarter, according to VentureWire data. In other words, venture capitalists are putting almost all their money into saving existing businesses, rather than starting new ones. "There are a lot of companies that aren't even being looked at [for funding]," says John S. Taylor, research vice-president of the National Venture Capital Assn. He predicts VC disbursements could fall from $7.7 billion in the third quarter to $6 billion in the fourth.
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Copyright 2001, Bloomberg L.P.
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