Supply rut or supply glut?
Office development is in full swing across the United States. 88 million square feet of space is currently being built, and that's on top of the 140 million that's been delivered since 2010.
It's easy to look around and wonder if there's room for any more cranes in the sky.
Compared to previous cycles, though, these numbers are rather low. Between 2003 and 2008, 279 million square feet were delivered nationwide, at an average of 5.4 million square feet per market. Markets today are averaging just 2.8 million square feet of new supply, and seven out of 50 markets we analyzed have no development activity at all.
Longer market recovery: Core markets and select secondary markets are growing rapidly, but the overall office market has been slower to recover and expand. Lending standards are tighter, and developers haven't been willing or able to finance projects in markets with higher than average vacancy and lower rent growth.
Shift in workplace preference: Secular shifts in the way we do work have resulted in higher density workspaces. Until recently, a lot of tenants were better utilizing existing real estate rather than expanding.
Over the last three years, though, development has been buoyed by economic momentum and an emphasis on new workplace design. As a result, occupancy growth has outpaced supply growth by 1.5 times.
We surveyed commercial real estate professionals in 50 markets to get their perspectives on local supply versus demand. Overall, office supply in 30 markets is expected to support tenant demand, but the experts think it may come up short in 17.
Oakland-East Bay and
Orange County, now enjoying substantial growth, both face low pipelines.
San Francisco Peninsula, which are preleased at 82 and 89 percent, respectively, are desperately seeking more supply to allow for further growth.
Silicon Valley have low vacancies and a shortage of quality supply due to high demand for tech and creative space.
which have the two largest development pipelines at 7.6 and 13.7 million square feet, respectively, expect new supply to provide relief and ease conditions for expanding tenants.
Houston is awaiting 6.3 million square feet,
of which 59 percent is preleased. However, new vacancies
and sublease space will keep tenant conditions favorable through the end of this cycle and into the next.
Today, markets are growing and demand is strong, but we know all too well that growth eventually slows.
A recession in the near term is unlikely, but global economic uncertainty and dropping oil prices—and their impacts on the stock market—have recently raised some concerns. It's important to understand which markets may have the highest risk of oversupply should a shift occur. Based on our data, it may not be any (Houston aside).
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Vice President, Director of Research Local Markets
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Senior Research Analyst
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