Office Vacancies And Efficient Space Use, Standard & Poors, September 27,2012

This S&P report notes the decline in current and planned space per office worker.  Currently, this is being driven by the fact that companies are re-hiring personnel laid off in the recession to fill existing space, but the trend through later in the decade foresees a continuing decline as companies become more efficient in their use of office space.  Most notably, the S&P report highlights the potentially adverse credit consequences of this continuing decline in office space per worker.

Here is the lead:

More efficient use of office space has the potential to keep office vacancies elevated over the long term, which in our view would be a credit negative for commercial mortgage-backed securities (CMBS). A 10% drop in the current space used per worker would raise the office vacancy rate to near 18% by 2017 from 16% currently, according to our estimates, using second-quarter 2012 CBRE Econometric Advisors' (CBRE-EA) forecasts of additions to stock and employment growth. And although we believe it unlikely, if office use per person drops 10% below the long-term average, the vacancy rate could rise as high as 24%, holding all else equal. In addition, higher vacancy rates would likely lead to lower rent growth, which in turn would lower property level net operating income (NOI) and loan debt service coverage ratios (DSCRs). . .

And conclusion:

While a clear, widespread trend toward more efficient use of space has not yet emerged, we believe such a change could be a moderate hazard for CMBS credit. Overall office exposure in conduit CMBS is about 32%, though the 2012 vintage contains only 27% year-to-date. More efficient usage of space could keep the office vacancy rate elevated, which in turn would likely lower rents. Combined, these effects could be detrimental to property-level NOI and DSCR.

Click here for the full S&P report.