advanced search

Office Update

Apr 1, 2006 12:00 PM, By Ellen Parson, Managing Editor

After peaking at nearly 300 million square feet in 2000, the office construction market proceeded to take a serious nosedive over the next three years, plummeting 52% and bottoming out at 143 million square feet in 2003, according to figures from McGraw Hill Construction (MHC). However, after rising 13% to 162 million square feet in 2004, the slow road to recovery that began a few years ago is a path construction analysts believe the market will follow in the near future. Calling for a 9% bump to 167 million square feet, the operative word in MHC's “Construction Outlook 2006” is “slow” — as starts will certainly not approach the record level reached in 2000. That's not to say this sector's not poised for growth. According to MHC, “with gains in office employment holding at historically healthy levels, corporations will find that they must expand their office space to make room for growing ranks.”

According to its “Construction Outlook 2006,” a large portion of these ranks will be found on the country's coasts. In fact, several of the high-profile projects that materialized in 2004 in New York City's Lower Manhattan will actually help boost the outlook for office space this year and beyond. One is investment bank Goldman Sachs' new 2.1-million-square-foot “green” headquarters taking shape in Battery Park City across from the former World Trade Center site. At a price tag of more than $2 billion, the new 43-story office tower, which will be LEED gold certified, is scheduled for occupancy in 2009. Another is the infamous Freedom Tower, which after several postponements was scheduled to break ground in the first quarter this year but continues to be under negotiation. This structure, scheduled for completion in 2010, will feature 2.6 million square feet of office space as well as tenant amenity spaces, observation decks, restaurants, and more.

“Employment will continue to add jobs in the office market, especially in those sectors offering financial, business, and professional services,” says Heather Jones, a construction economist with Raleigh, N.C.-based FMI, a provider of management consulting and investment banking to the global construction industry. “This will drive demand for office space. Vacancy rates will continue to drop, absorption will continue to outpace completions, and rental rates will continue to increase.”

In its “2005-2006 U.S. Market Construction Overview,” FMI noted that expenditures for office construction ended up at a moderate 5% increase in 2005 for a total of $46.2 billion. The firm anticipates this upward trend will continue, calling for a projected increase of 10% or $4.6 billion above the 2005 level. Construction costs per square foot are also slated for a bump, due to building material shortages caused by the current construction boom in China, an improving economy, and record levels of U.S. construction.

According to FMI's report, one of the key reasons for this development includes “employment growth particularly in office-using segments, which are expected to grow at a stronger pace than overall employment, increasing by 3.5% or 1 million jobs. Coastal markets — characterized by high population growth and accelerated occupancy gains are projected to drive the office recovery while markets in the Midwest are expected to grow at a slower pace due to below average job growth and weaker economies.”

Given the growing labor market and the resulting decline in vacancies, FMI also expects rental rates for office space to rise. “One possible outcome this may have is that cost-conscious tenants will move away from the high-rent central business district areas, relocating to less expensive, lower-rent office spaces in suburban areas,” states the report. But don't count out the inner cities just yet. The same study indicates that “tax incentives offered by many inner cities are having a positive effect, and many developers are continuing to renovate old buildings in downtown areas rather than developing new structures in suburban areas.”

Such improvements tend to be in the city while new construction occurs more in the suburbs, notes Jones. “However, suburban growth is stronger than urban growth,” she says. “High-rise and low-rise vary depending upon the location. Although suburban areas tend to have more low-rise office buildings, that trend will change as suburbs become larger and begin to host more high rise buildings. This trend is beginning in some markets but is a ways off for most.”

Want to use this article? Click here for options!

© 2012 Penton Business Media, Inc.

---

Acceptable Use Policy blog comments powered by Disqus

Browse Back Issues Select an Issue November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 1, 2009 December 2008 November 2008 October 1, 2008 September 2008 August 2008 July 2008 June 1, 2008 May 2008 April 2008 March 2008 February 2008 January 2008 December 2007 November 2007 October 2007 September 2007 August 2007 July 2007 June 2007 May 2007 April 2007 March 2007 February 2007 January 2007 December 2006 November 2006 October 2006 September 2006 August 2006 July 2006 June 1, 2006 May 1, 2006 April 2006 March 1, 2006 February 2006 January 2006 December 2005 November 2005 October 2005 September 2005 August 2005 July 2005 June 2005 May 2005 April 2005 March 2005 February 2005 January 2005 December 2004 November 2004 October 2004 September 2004 August 2004 July 2004 June 2004 May 2004 April 2004 March 2004 February 1, 2004 January 1, 2004 December 1, 2003 November 1, 2003 October 1, 2003 September 1, 2003 August 1, 2003 July 1, 2003 June 1, 2003 May 1, 2003 April 1, 2003 March 1, 2003 February 1, 2003 January 1, 2003 December 1, 2002 November 1, 2002 October 1, 2002 September 1, 2002 August 1, 2002 July 1, 2002 June 1, 2002 May 1, 2002 April 1, 2002 March 1, 2002 February 1, 2002 January 1, 2002 December 1, 2001 November 1, 2001 October 1, 2001 September 1, 2001 August 1, 2001 July 1, 2001 June 1, 2001 May 1, 2001 April 1, 2001 March 1, 2001 February 1, 2001 February 1, 1995 January 1, 2001 December 1, 2000 November 1, 2000 October 1, 2000 September 1, 2000 August 1, 2000 July 1, 2000 June 1, 2000 May 1, 2000 April 1, 2000 March 1, 2000 February 1, 2000 January 1, 2000 December 1, 1999 November 1, 1999 October 1, 1999 September 1, 1999 August 1, 1999 July 1, 1999 June 1, 1999 May 1, 1999 April 1, 1999 March 1, 1999 February 1, 1999 January 1, 1999 December 1, 1998 November 1, 1998 October 1, 1998 September 1, 1998 August 1, 1998 July 1, 1998 June 1, 1998 May 1, 1998 April 1, 1998 March 1, 1998 February 1, 1998 January 1, 1998 December 1, 1997 November 1, 1997 December 1, 1996 November 1, 1996 October 1, 1996 September 1, 1996 August 1, 1996 July 1, 1996 June 1, 1996 May 1, 1996 April 1, 1996 March 1, 1996 February 1, 1996 January 1, 1996 December 1, 1995 November 30, 1995 November 1, 1995 October 1, 1995 September 1, 1995 August 1, 1995 July 1, 1995 June 1, 1995 May 1, 1995 April 1, 1995 March 1, 1995

browse e-newsletters