Patterns of Office Employment Cycles
Shilton, Leon, The Journal of Real Estate Research
Abstract. Based upon an the analysis of quarterly office employment and total employment changes from 1975 through 1994, this research concludes that for a majority of the fifty metropolitan areas, office employment cycles are converging towards seven year cycles. However, many of the patterns are emerging and for one-third of the cities, the office employment changes are a random walk. While changes in office employment and total employment are correlated, neither series lags nor leads the other. Office employment grew faster than total employment, but office employment changes were more volatile.
The poor investment performance of the office property sector during the last recession revives the analysis of office development timing. Looking at office employment changes, developers muse as to when in the real estate cycle to start development. Meanwhile, property managers devise leasing strategies to buffer their properties against office employment volatility.
This research seeks to answer:
Cycles: Is there a generic office employment cycle in the United States? Can the optimal time for office development be discerned?
Latitudinal: Is the cycle length standard or does it vary across metropolitan areas?
Composition: Are structural changes in the economic base affecting this cycle?
Lag: Does office employment in a metropolitan area lag or lead changes in its total employment?
For fifty metropolitan areas, this research classifies at the three-digit Standard Industrial Classification (SIC) level the office employment growth patterns during the two business cycles since 1974.
Previous analysis of local office space cycles usually focused on the impact of new supply on vacancy levels (Born and Pyhrr, 1994) and rents over time (Shilling, Sirmans and Corgel, 1987; and Wheaton and Torto, 1988). Rents and vacancy changes were found, at least nationally, to follow the usual depiction of the sinal wave curve of the business cycle (see Exhibit 1). Because of faulty information processing prevalent in the real estate industry (Shilton and Tandy, 1993), however, there is no common agreement about these statistics in any given metropolitan area. The use of these statistics to measure a cycle is therefore questionable.
As an alternative, this research tests how cyclical is office employment, the underlying driver of office demand. In contrast to the extensive studies of manufacturing employment cycles, the analysis of office employment and how it drives demand for office space has been limited (Born and Pyhrr, 1994). The view that office space demand is either a residual of manufacturing/service activity and/or some function of total aggregate employment (Carn, Rabianski, Racster and Seldin, 1988) resulted in a focus on the cyclic nature of total employment. Thus, the subject of the patterns of office employment and how they might affect office space demand has not been fully explored.
Noyelle and Stanback (1984) concluded that the economic base of a city could no longer be described chiefly as a function of its manufacturing base. In a service-oriented economy, the office employment profile may depend on the nonmanufacturing function of the city (trade, banking, services, etc.) and not the type and magnitude of manufacturing employment (Shilton and Webb, 1991).
The employment data of the SIC group 60-69-Finance, Insurance and Real Estateand of other selected SIC groupings from business services employment sector group SIC 70-79 (Wheaton, 1987) are commonly used to estimate office space demand. This hybrid proxy, however, still underestimates employment for the number of industries that use office space (Kelly, 1983; and Shilton, 1985, 1995).
Using fine grained office employment data bases at the three-digit SIC level for a twenty-year period for fifty cities, this study attempts to discern the changes in office employment and what, if any, distinct patterns emerge. …