by Calculated Risk on 10/30/2008 12:27:00 PM

One of the key components of non-residential structure investment is construction of new offices. When the supplemental data is released for Q3 GDP, I expect it will show that office investment started to decline in the most recent quarter - and I expect office investment will decline significantly over the next year.

The following graphs show office vacancy rate vs. unemployment (hat tip Will).

Click on graph for larger image in new window.

The first graph shows the office vacancy rate vs. the quarterly unemployment rate and recessions.

Changes in the unemployment rate and the office vacancy rate are highly correlated. As the unemployment rate continues to rise over the next year or more, we'd expect the office vacancy rate to rise too. And this will discourage investment in new office structures - and put significant pressure on office rents and prices.

The second graph shows the relationship between the office vacancy rate and the unemployment rate using data starting in Q1 1991. The unemployment rate is from the BLS and the office vacancy rate is from REIS.

I've added the polynomial trend line (with R^2 of 0.88). The two most recent quarters are marked in red.

This suggests that office vacancy rates are currently below the expected level, and vacancy rates will probably increase sharply over the next year.