In a Denver spa not long ago, I asked my steam-room compatriot (a Denver local) what he was paying for office space.

"Five cents a foot," he said.

"Per year?" I asked incredulously.

"Per year," was the answer, and he had been out that day shopping for a better deal. How can that be? How can something costing $16 or $17 a year to operate sell for 5

What my Denver friend has happily discovered is an example of the strange circumstances a major economic transition can produce. His particular case may be among the most extreme -- but it's being repeated to some degree in almost every real-estate market in the country. There is a glut of office space at the end of a four-year period when demand for it has been extraordinarily strong. We should be out of office space by now, as we were in 1980 after the 1976-1980 boom. But we're not -- not by a long shot. How did this happen, and what does it mean for all of us who own or lease space?

The explanation has to do with demographics -- which, as we'll see, one ignores at one's peril. The story starts about 15 or 20 years ago when the war babies began to hit the labor force. Their arrival caused a huge bulge in the pace of employment growth, speeding it by 26%, beginning in the decade 1965-1975. A graph of the war baby employment influx (see figure 1) looks like the profile of a snake that has recently eaten a watermelon.

About half the war babies, of course, were women. But unlike their mothers, many of these women decided they wanted to work as well as raise families. From the immediate postwar years to 1985, the percentage of women who worked nearly doubled (see figure 2) -- this at a time when the number of women available to work was rising as well.

The office-space story is made richer by the fact that war babies of both sexes decided they didn't want to work in factories. Of the 38 million jobs added to the economy between 1966 and 1986, not one was in manufacturing. Most of the war babies wanted to work in offices. They wanted to join the service economy, wear white shirts, and become managers or clerks.

So we built them offices -- at an extraordinary rate. Between 1975 and 1985 alone we built 36% of all office space ever built in the history of America. Since most of it was leased, since there was an enormous amount of money pouring in from swelling pension funds and from abroad (initially from Europe and the Middle East, more recently from Japan), and since the tax codes made it very profitable to build office space and even to hold it empty for a while -- we kept on building.

In fact, we built far more than we needed at the time, because there always appeared to be some greater fool who would come along and take it off our hands. (The "greater fool" theory explains many economic follies of the past, and this one is no exception.) In general, one in five office buildings built between 1975 and 1985 was not needed. In the Mountain West it was almost one in two; in the Oil Patch, more than one in three; in the Pacific West, about one in three (see figure 3).

Vacancy rates began to soar even as employment growth continued. By 1985, about one out of every five office buildings in the country was empty. In some cities, the rate was much higher. It was 25% in Houston, 22% in Denver, 23% in Dallas, and 33% in Phoenix.

Then a new reality began to set in. In some places, it was worse than reality. The oil shock delivered blows to the economies of Houston, Dallas, Denver, Tulsa, and New Orleans, the likes of which they had never seen. To make matters worse, Congress revised the tax code last year, making it no longer desirable to lose money -- quite a jolt to the real-estate industry.

At the same time, other, more pervasive, trends began to emerge. By 1985, the watermelon was just about through the snake. Many women who had put off having children decided it was time to do so, and, in some cases, left the labor force. Employment growth began to slow down, and now is expected to slow even more -- the rate for the next 10 years will be close to half what we've become used to. And my best guess is that the next 2 or 3 years in particular will be worse than that.

A study I did for Massachusetts Institute of Technology's Center for Real Estate Development predicts that during the next 10 years, under the most promising scenario, America will need to build only 50% as much office space as was built during the past 10. And however bad that sounds, it could be an understatement. The Fortune 500, from 1980 through 1986, reduced their employment by 2.8 million jobs -- that's about the same as today's total work force in the commonwealth of Massachusetts, public and private. Most of those companies work with long-term leases that did not expire when they eliminated 2.8 million people. Now they are sitting on huge amounts of leased but empty space that is not counted in the vacancy statistics. A rough estimate suggests that these companies are holding enough vacant space to reduce the need for new construction in the next 10 years to one-quarter of its previous levels.

But construction hasn't stopped. It's slowed down, but not nearly enough. Buildings going up today were designed, financed, zoned, and committed to several years ago. Like turning around the Queen Mary, stopping the office-construction industry takes a long time. The result? Buildings are actually declining in value. Average rents in buildings that break even at $16 or $17 a foot are $7.50 a foot in some Oil Patch cities. My Denver friend's rent, to come full circle, was down to 5? a foot -- and he was searching. Even so, things will get worse before they get better.

For those of us who are tenants (and that's most of us), the overbuilding of office space is a real bonanza. You may not be able to do as well as the folks in Denver, but with even a modest amount of shopping you should be able to reduce your current rent, obtain free rent for several months, obtain substantial tenant improvements at no cost, and lock in attractive options on adjacent space so that you won't have to disrupt your company as you grow. This is a particularly good time to start a company in such a place as Houston, since you probably can live rent-free for a year or more. I was told of one lease in Dallas where the tenant's sole financial obligation for 200,000 square feet of new space over a five-year period was to keep the lights on until 11 p.m. and post a guard.

For prospective buyers, too, times are great. The main consideration -- as continued construction in a slowing economy depresses the market further -- is timing. The banks are just beginning to feel the pinch, as their real-estate portfolios shrink in value. The next 12 to 18 months could be an excellent time to acquire either a building or a long-term lease on very attractive terms.

Then there are the people who build and sometimes own buildings: many growing businesses, and many readers of INC., are developers. If you are one of them, your mission is clear. The time has come to switch from developing to managing. There are a few new buildings to be built, but not many, and everyone will be wanting to build them. Your main focus will have to be on managing better what you already have. You will have to figure out who needs your space -- mostly smaller, growing businesses. You will have to find those companies -- which is tough, because they're spread all over the place. And you will have to keep them happy. You'll have to offer them the day-care facilities, fitness centers, responsive building management, and aesthetics that they seek and -- under the current circumstances -- can demand. It will not be an easy time to be a developer.

Any major shift in the economy offers opportunities and causes problems. The oil shock hurt some cities and states badly, but helped the majority of us by lowering oil prices and keeping inflation under control. So it is with the overbuilding of office space nationwide. Some developers and banks and insurance firms will be harshly punished. The majority of us, though, will have an opportunity, over the next year, to acquire inexpensive office space under terms unparalleled in recent history. From our perspective, it couldn't be a better time to start and grow a company.