Development Magazine Spring 2016

Forecasting Office Space Demand

A new NAIOP research report describes the model that researchers are using to prepare a biannual Office Space Demand Forecast, which debuts in the second quarter of 2016.

SINCE 2009, the NAIOP Industrial Space Demand Forecast has provided NAIOP members and the entire commercial real estate community with a concise and accurate forecast that predicts net absorption of industrial space in the U.S. For eight consecutive quarters, on a quarter-by-quarter basis, Dr. Joshua Harris at the University of Central Florida and Dr. Hany Guirguis at Manhattan College forecast the amount of industrial square footage they expect to be absorbed. Their model is based on key indicators that are closely tied to goods movement and manufacturing.   

Harris and Guirguis are now preparing a similar forecast for office space demand. Their new NAIOP Research Foundation-supported report, “Forecasting Office Space Demand” presents the model they have developed to forecast net absorption of office space, as well as the research and testing behind that model.

As the authors note in the report, “This model can become a valuable aid to enhance decision making for many different applications, including acquisitions and dispositions, development timing, financing decisions, asset management and leasing decisions.”

Harris and Guirguis’ research “involved testing various economic determinants with a likely relationship to changes in office demand.” The authors explain, “We looked for strong logical correlations as well as the ability to give leading guidance (i.e., determinants that shift before a change in office demand occurs). We also looked for determinants that are simple to understand and have stable interpretations regardless of economic climate. Finally, we explored determinants that fit in a simple yet powerful dynamic model.”

Their model uses the following five simple variables to forecast office space demand, each of which has a direct relationship to the business prospects and health of office space users:

1) Gross domestic product (GDP).
2) Corporate profits — all domestic industries.
3) Total employment — financial activities.
4) ISM-NM Inventories Index.
5) ISM-NM Supplier Deliveries Index.

The first three are direct macroeconomic variables, while the fourth and fifth are forward-looking measures from the Institute for Supply Management’s Non-Manufacturing Indices. All of these variables are clearly correlated and related to net absorption of office space.

NAIOP will publish the Office Space Demand Forecast in the second and fourth quarter of each year, alternating with the Industrial Space Demand Forecast, which will continue to be released every first and third quarter. Both models will provide quarterly net absorption forecasts for eight consecutive quarters. 

For more information:

Forecasting Office Space Demand,” Dr. Joshua Harris and Dr. Hany Guirguis, NAIOP Research Foundation, January 2016.

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