Ken McCarthy, Principal Economist
- Financial services companies are set to occupy more office space over the next two to three years.
- The financial sector recovered slowly early in the recovery, but has accelerated in recent years and is now back to its long-term trend of adding about 120,000 jobs per year, up from 77,000 early in the expansion.
- This stronger performance will impact some markets more than others, and not just the large financial services sector centers like New York. Markets where the financial sector is a large part of the local economy, like Miami and Tampa, will benefit greatly from this revived growth.
The financial services sector is the largest office space user in the U.S. In the first four months of 2018, there were slightly more than 8.5 million people employed in the financial services sector representing about 27% of all office-using jobs in the country.
From 2014 to 2017, more square footage was leased by financial services sector companies than any other industry when looking at new lease activity. Financial services sector accounted for 16.5% of new leases signed in that time period, compared to 14.7% for technology companies and 11.8% for professional services companies.
Growth in the financial services sector will continue to be an important driver of demand for office space over the next three years. However, looking back at employment data, it is clear that the financial services sector was one of the last to fully recover from the recession. Employment in the financial services sector peaked and began declining a full year earlier than total employment at the end of 2006 and did not fully recover until the beginning of 2017, a full decade after its peak.
However, the tables have turned since 2015. Financial services employment has grown more rapidly than the U.S. as a whole during the last two years. Since the end of 2015, U.S. financial services employment increased at a rate of about 1.9% per year, stronger than the 1.6% pace of total employment.
Past performance also suggests that financial services employment growth will remain healthy in the near future. Since the recovery in financial services employment began in 2010, the sector has added an average of 122,000 jobs per year. This is almost identical to the trend in this sector over the 16 years before the recession. From 1990 to 2006, the trend in financial services employment growth was approximately 124,000 jobs per year. Given this relatively constant, albeit slightly declining, average performance, we believe it is reasonable to expect this sector to add about 122,000 jobs per year over the next few years, which would be about 1.5% per year.
We believe there is an upside to the forecast that financial services employment growth may be even stronger than 1.5% per year for two reasons. First, the Trump Administration has indicated its intention to roll back some of the restrictions placed on the sector following the 2007/09 recession. In addition, financial firms have benefited from the recent performance of financial markets and interest rate increases, which have helped to boost revenue and profits from trading operations. If these two trends continue, this could also lead to even more hiring in this sector.
Assuming the economy adds 122,000 financial services jobs per year, in the first quarter of 2021, financial employment will reach 8.9 million jobs and be 4.3% higher than in Q1 2018.
However, these jobs are unlikely to be added equally across markets, and some markets will have a disproportionate share of jobs.
New York City is, by far, the market with the largest number of financial services jobs at approximately 475,000. The number of jobs drops dramatically after that to about 300,000 each in Chicago and Dallas, and then 200,000-250,000 jobs in Los Angeles,
Philadelphia, Phoenix, and Boston. But when we look at financial employment’s share of total jobs, a slightly different picture emerges, While New York is still at the top, markets like Fairfield County, Jacksonville, and Phoenix rise near the top.
If we assume that financial services employment increases approximately 4.5% over the next three years (from Q1-2018 to Q1-2021), New York will add roughly 28,000 financial jobs, Dallas 18,000, Chicago 16,000, etc.
Indeed, we have already seen a commitment that will lead to substantial growth in New York. JP Morgan Chase has announced its intention to build a new world headquarters in Manhattan and increase its headcount by more than 1,000 people when the project is completed several years from now.
How will financial services job growth impact office markets? That depends on how financial firms use space. We looked at financial firm occupancy in the top seven financial services markets and compared it to financial employment to get an estimate of occupancy per financial services employee. Using this data, while there are variations between markets, we find that on average each financial services employee occupies about 110 square feet (sf). If we use this as a rough guide to the market impact of higher financial services employment, we can see where the impact is likely to be greatest. Space use can vary across markets and time, so we looked at a range between 100 sf per person to 125 sf, to get a sense of the potential impact.
Of course, in terms of square footage absorbed, the markets with the highest financial services employment will see the biggest impact.
So New York City would experience an additional 2.5 million sf (msf) to 3.5 msf absorbed between 2018 and 2021, Dallas would see an added 1.8 to 2.2 msf of absorption, etc. These absorption projections are consistent with recent performance. For example, over the last two years New York City has seen more than 12.5 msf of absorption and Dallas has had more than 8.0 msf.
But relative to the size of the market and current market conditions the impact is very different.
Looking at the top 25 markets, several cities may see the vacancy rate drop substantially, including Miami, Tampa, San Antonio, Cincinnati and Orlando. In these markets the combination of a modest inventory and larger than average financial services sector leads to a sharp drop in vacancy because of a robust financial service sector. For example, in Tampa financial employment represents 8.7% of all jobs, far above the national total of 5.8%. But Tampa’s inventory is roughly 31 msf. So a change in financial employment has a much greater impact in the Tampa market than other markets like Manhattan where, despite a large financial sector, the vacancy rate would only decline 80 basis points.
Financial services employment is more important, relatively to the local economy in many of these markets. In fact, several of these markets: Orlando, Tampa and Jacksonville were in the top 15 biggest in terms of vacancy declines between the beginning of 2015 and the beginning of 2018.
Ken McCarthy has been with Cushman & Wakefield since August 2006. As Principal Economist, he works with the Chief Economist on Cushman & Wakefield’s U.S. economic position and presents it to the public. As Applied Research Lead, Ken is responsible for preparing cutting edge research about the outlook for commercial real estate in the Americas.