ARE BUILDINGS OBSOLETE? 

The 25 year period from 1865 to 1890 was the age of the railroad building spree across North America. Everyone got into the act. The iron horse helped open up America in a manner never before possible, propelling new immigrants westward and economically upward to undreamed of heights. Shortly after Ford and rubber tires appeared, the railways began to fade.

The 15 years from 1975 to 1990 was the age of the building spree around the world. The volume of office, commercial, industrial and even residential floor space reached unheard of levels. The building boom along with the construction of the necessary supporting infrastructure, also propelled most earthlings to new levels of affluence, even in such developing countries as India. Could buildings, as we have known them, also vanish in the years to come?

All trends suggest the answer is "yes". Look at commercial office space. Sydney, Australia, known for never having vacancy rates above five percent, saw vacancy rates shoot up from two to 11 percent. In Toronto, vacancies are at 11.9 percent with another 10.3 million square feet of office space coming on stream this year. With the Ontario economy reeling from the depression and investors reluctant to make new investments because of recent legislation and threatening suggestions by the newly elected socialist NDP government, office vacancy rates have to increase. Perhaps to 20 percent.

This is not impossible. In the United States, real estate excesses have reached new heights. Everyone thought being "King of the Hill" was a great, lucrative, exciting game. This role model was followed almost everywhere to a lesser degree. Look at the picture today: Out of the 30 top commercial real estate markets in the U.S., 20 of those areas have vacancy rates higher than 15 percent. One source says the actual current vacancy rate in Los Angeles is 25 percent! Houston and other oil patch cities are running around a quarter empty. GLOBAL FINANCE magazine quotes Daniel Neidich of Goldman Sachs as "predicting that vacancies won't be low enough to attract new development for another eight or nine years".

If that sounds bad, look at London, England, where vacancy rates now at 15 percent, a record in almost any European city. Rents have dropped 35 percent to $29 per sq. ft. and the forecast for both of the above is looking lower as surviving leasees seek ways to cut costs. The world's biggest landlord, Canada's Olympia & York Corporation are under bankruptcy protection in New York, London and at home in Toronto. By the time that story ends, some banks and governments will topple. In Tokyo, rents have dropped 20 percent, although vacancy rates still hover between the "street rating" of five percent and the official figure of around one percent. In a country where bank interest ran around 3.5 percent when U.S. rates were galloping along at 10 percent, it is quite a shock to find that makes a difference. A big difference. Now that Japanese interest rates have risen, some are predicting a drop in real estate values of up to 30 percent in 1992.

An even bigger shock to global confidence comes from Switzerland where bank real estate loans total SFr 363.7 billion and total bank equity is only SFr 67.3 billion.

All cities keep track of their vacant commercial and office space. Those are the figures above. What they DO NOT keep a record of, is what I call "invisible vacancies". These are the spaces that become vacant when corporations down-size and put their entire operation on two floors instead of four. When that occurs they are still paying rent to their landlord for that vacant space but it does not show up on any official record. Naturally, such companies are trying to sublet such areas and in many cases, are willing to offer a give-away deal to any prospective tenant.

I suggest that such areas could add as much as ten percent to a cities "official" vacancy rate! This will eventually show up in the sluggish rental of existing visible vacancies, because the "invisible vacancies" are willing to offer rental at any price, because whatever they get will detract somewhat from that big hole in their current balance sheet.

The trend may even accelerate as new unbelievably compact optical storage systems reduce the amount of required office storage space even further. For example two floors out of every thirteen in any office tower is occupied with just storing manilla file folders. With the average floor comprised of 10,000 square feet that adds up to a lot of money, around $1,000.000 for the two floors. All that can now be stored on one SERODS (Surface Enhanced Raman Optical Data Storage), a 12-inch disc!

On top of all of the foregoing is the trend towards, small, new businesses that are operating from the home. One recent figure, in Canada says that 23 percent of the Canadian workforce is now doing some of their work at home. All indications say this trend will continue, adding another damper to the rental of traditional office space.

In the 19th century we overbuilt railway lines and railroad rolling stock. Have we overbuilt fixed capital building assets in the fading days of the 20th century? Can wealth, held in fixed assets go through a devaluation similar to what happened to the German mark after World War I? To a degree, yes.

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