When you look at the five-year forecast for the office construction market, the speed at which industry analysts expect it to grow resembles more of a tortoise than a hare — a prediction that could prove profitable for many of the nation's electrical contractors in the long run.
According to “The U.S. Markets Construction Overview 2007” report by FMI, a Raleigh, N.C.-based provider of management consulting and investment banking to the construction industry, office construction will slowly yet steadily advance in 2007 and continue to grow through at least 2011. Even in the face of rising labor and material costs and a sagging single-family housing market, FMI expects office construction to grow by 7% in 2007 to $58.4 billion. For 2008, FMI forecasts another 7% increase to $62.5 billion. It expects this trend to continue, predicting between 6% and 7% growth per year through 2011, eventually reaching $75.1 billion in 2011.
Although economic growth for 2007 is predicted to be slightly more restrained than in years past, the U.S. job market remains healthy, and is thus fueling demand for office space. “The main driver of office construction right now is employment,” confirms Heather Jones, a construction economist for FMI. “Service jobs are the fastest growing segment, and this is the segment that uses the most office space. Corporate profits are also a driver. Large corporate profits generally result in business expansion and hiring activities, which then drive demand for office space. According to Grubb & Ellis, net absorption was 65 million square feet in 2006 and is expected to be 55 million square feet in 2007.”
Not only does this increase in employment and corporate earnings signify greater demand for office space, but it also means declining vacancy rates. In its “Construction Outlook 2007” report, McGraw-Hill notes that suburban vacancy rates were down to 14% in the third quarter of 2006, while the downtown vacancy rate declined to 11.7%. Cities enjoying exceptionally low downtown vacancy rates include Charlotte, S.C., (5.1%), New York (specifically midtown Manhattan; 5.5%), Washington, D.C. (7.7%), and Boston (8.2%). At present, Honolulu, Miami, Fort Lauderdale, Fla., Tucson, Ariz., Palm Beach County, Fla., and Orange County, Calif., have the lowest suburban vacancy rates.
The combination of declining vacancy rates coupled with the need for additional office space has led to another boon for the office market — higher rental prices. According to Atlanta-based Reed Construction Data, rent increases are averaging 5%-plus over last year. FMI's Jones agrees. “Asking rental will move higher in 2007, with Grubb and Ellis predicting Class A rates will rise from $40.93 to $44.21 per square foot,” she says.
In turn, higher rents will help spur more construction. On the downside, rising material prices, a surge in domestic construction, and immense growth in China will likely keep the cost per square foot at an increased level. However, costs are expected to stabilize at this higher rate for the next few years, barring any unexpected catastrophes.
How are office construction dollars being spent? Jones says that while present office construction is approximately 80% new and 20% improvement, this mix is starting to change. Over the next few years, improvements are predicted to account for “a little larger piece of a larger pie.” When it comes to new construction, Jones points out that suburban locations are growing faster than urban locations, but the latter tends to require more improvements.
Other factors FMI sees affecting this market include the expanding population in the South and West, as well as immigration and net migration. “As immigrants become increasingly employed, more office space is needed,” Jones says. “Net migration — leaving one state for another — is also driving growth. As companies and employees flock to the South and West, new space is needed. There may be empty office buildings in Detroit, but that's not doing the market any good in Atlanta.”