There is no dramatic overbuilding of office anywhere in the country, according to Jeff Kanne, CEO of National Real Estate Advisors. Indeed, during the past seven years there has been more absorption than delivery, adds Jaime Fink, managing director of HFF.
While there may not be overbuilding, there certainly has been building. National office forecasts produced by CBRE Economic Advisors see “2017 as the peak of construction completions nationally at about 61 million square feet, which was about 50 percent higher than 2016,” says Andrea Cross, Americas head of office research at CBRE. “They’re predicting that 2018 will see about 47 million square feet of new office space.”
Ed Zarenski, a construction economics consultant and blogger, points out, “Nonresidential building construction has been increasing since 2011. The office market has been one of the most active nonresidential markets, averaging more than 20 percent spending growth for the three years 2014, 2015 and 2016. Construction spending slowed in 2017 for offices, but still 2017 will surpass the previous 2008 high. Spending growth should pick up again to 13 percent growth per year for 2018–2019.”
That raises additional questions, such as what regions will experience the most growth. Five major markets constitute half of the office space under development: Manhattan; Washington, D.C.; San Francisco; San Jose; and Seattle. Developers have been drawn to the markets’ low vacancy rates and high rents.
Of course, opportunities exist outside the major markets. Smaller markets with less supply than their historical average, according to Fink, include Atlanta; Charlotte, N.C.; Chicago; Minneapolis; San Diego; and Tampa, Fla.
Technology companies are driving office development.
“Tech has been a large contributor to jobs in several major markets over the past few years,” says Ryan Biernesser, trader, mortgage credit, at Semper Capital.
Politics is another factor. San Francisco’s Proposition M (passed in 1986) limits the amount of annual high-rise development.
Then there is labor. This has been a long real estate cycle, and construction labor is getting more expensive. The construction industry is still adding jobs, but, says Cross, “the labor market is so tight at this time that it’s becoming increasingly competitive to find construction workers.”
As construction costs go up, new developments often fail to pencil out.
The good news: Office markets appear to be at equilibrium.
“The historically supply-constrained markets have seen the most development,” says Fink, “while the majority of the other office markets are experiencing development substantially below their historical averages.”
Cross adds: “Basically, it’s been a measured supply response to demand for offices. And that’s a good thing, a healthy thing for the market.”
Michael Lester is a freelance writer based in the San Francisco Bay Area.
