Over the past few months clear signs emerged that the economy had encountered a soft patch that not only threatened its recovery, but also cast doubt on commercial real estate's ability to hold its ground. Showing stable—if slow—job growth, the two most recent jobs reports and favorable revisions to prior releases have tempered fears of a relapse, but this has yet to allay investor concerns. In fact, in recent discussions I have had with real estate professionals, their most urgent questions relate to how the slowing will affect the commercial real estate recovery and whether it will trigger a re-tracing of fundamentals.

The sustainability of the commercial real estate recovery itself is an important point of discussion, at the moment more pertinent for office, perhaps, than any other property type. The lull in economic activity that we saw through midyear had a significant impact on the job market, which slowed to a crawl, dealing a severe blow to consumer confidence. The office market derives demand directly from new job creation, so a slowing job market is particularly troubling. Where multi-housing, industrial and retail have continued to see vacancy (or availability) rates decline, office has experienced a measurable slowdown in progress—something that was highlighted during Q3 when the vacancy rate was unchanged at 16.2%. Moreover, office net absorption slowed to just 3.2 million square feet during the quarter; a fraction of what is typical in a healthy market.

Though the lull in demand corresponding to a slower economy is troubling, it is not necessarily indicative of a market on the verge of correction. In fact, I'd make the case that the office market is well-positioned to take advantage of even moderate increases in hiring that we expect to see over the next six to eight months. So we start with the assumption that, rather than being headed for another recession, the economy is working its way out of a soft patch and will continue to improve over the next year. With that in mind there are two points to make: the first deals with the composition of growth—that is, which industries will drive the demand recovery—and the second with how much growth in general do we need to keep moving forward on a sustainable path.

Let's start with the composition of office-using job growth and how it relates to the recovery. Overall, employment in office-occupying occupations is down 6.5% from the pre-recession peak across all markets, indicating a great deal of slack in the market. If we look a little more closely, however, the office-services component (excluding financial services) is down 5.5% from its pre-recession peak. While this is still a great deal of ground to cover, we have seen continued progress since the recession ended.

Moreover, the secular decline of financial services has diminished their importance in the demand for space over the past 20 years. In many markets the professional, scientific and technical services category has been replacing finance as a demand driver for office space; it includes occupations such as legal and accounting services as well as computer design and other high-tech jobs. These comprise human capital-intensive, well-paying occupations that are an increasingly important source of demand in top-tier office markets nationwide.

Just as important, however, is that job growth in the category has accelerated through 2011, while others have slowed. On a year-over-year basis, professional, scientific and technical service firms are adding jobs at a rate of 2.2%, which is on par with historical trend. Looking at some of the markets where these types of jobs account for a large share of office-employment, we see that the list includes some of our top growth prospects, including Austin, Boston, San Francisco and even New York, which continues to see its demand outlook determined more by technical services than by financial activities.

The second issue is the question of how much growth the office market actually needs in order to see sustained improvement. The answer may be surprisingly little. Although shadow space—the result of somewhat stable demand in the face of severe job cuts—is understood to delay improvements in office occupancy, to date this has not been the case entirely. While a slow job market recovery coupled with a good deal of shadow space in the market has resulted in a very slow recovery, measurable improvements have been observed across markets for well over a year.

There are several factors that are driving this recovery, one of which (discussed above) is the composition of job growth and how it can affect key markets. Another is that a swift, severe rent correction created an environment that favored tenants, offering them the opportunity to upgrade, renegotiate, or simply expand their leasing footprints at lower rental rates.

Perhaps looking at office job growth relative to completions can provide more telling evidence. This relationship gives us a sense of how quickly the labor market needs to grow in order to absorb new space and allow the demand recovery to sustain itself. In essence, once unobserved slack is absorbed from the market, sustained demand increases will improve occupancy and allow for broader improvements in fundamentals—if job growth consistently outpaces new supply.

We can see two instances where this happened: once following the building boom of the 1980s and then recession of 1990-91, and again following the 2001 recession. Both were followed by a slowdown in development and a labor market recovery. Today we have a similar situation, even given the very slow overall job growth. Office payrolls are growing at a year-over-year rate of just over 1%—about half the historical norm. At the same time, however, the lack of any new construction gives us a scaled growth rate that exceeds that of the last recovery. With the rate of completions expected to decline further over the next two years—matching previous historical lows—an employment growth rate of just over 1% would be enough to maintain the ground the office market has gained, or even to move it forward modestly.

The bottom line is that the office market still faces a lengthy recovery—but the pieces are in place. For starters, the economy is showing early signs that it is shaking off its mid-year hangover. Moderate and improving job growth will allow tenants to backfill excess space and eventually expand their operations, thereby generating more demand. Given the slow rate of construction, over the next couple of years we should see the office market absorb the shadow space that the recession left behind, setting the stage for more measurable improvements in rent and income. As this occurs, however, it is equally important that investors examine specific demand drivers at the local level, which will account for diversity among markets during the office recovery.