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Office Construction Sector Shows Signs of Strengthening

Nov. 15, 2013
Outlook for the office construction market reveals opportunities for electrical contractors

Following a plunge in office construction and renovation work in recent years, the market is finally starting to show signs of life again. At this point, however, it’s not a robust recovery.

“The U.S. office market is experiencing positive growth in construction, but at levels that are quite reduced compared to historical levels,” says Raymond Torto, global chairman of research for CBRE. “Things are not the way they used to be, and they’re certainly not as strong. That’s something electrical contractors will need to think about when they put together their [2014] business plans.”

CBRE, which tracks 60 of the major real estate markets in the United States, calculated that the average construction in square footage for these markets was 50 to 55 million sq ft 10 years ago (see Chart). When the recession hit, the amount of construction in this sector plunged. In 2011 and 2012, however, construction increased to about 9 million sq ft for those markets, and for 2013, it may be on target to reach about 12 million sq ft. Over the next three to four years, the square footage could climb to about 30 million sq ft in those 60 major markets.

“As we look forward in construction, we see it getting better over the next few years,” Torto says. “There have been some new buildings and economic growth, but even if it gets to 30 million sq ft for the 60 major markets in the United States, construction will only be half of what it was before.”

The mild recovery in the office construction market can be attributed to the weak employment gains, subpar economic growth, and tepid improvement in office rents and vacancy rates, according to McGraw-Hill Construction. Nationwide, office construction rose just 6% in 2011 to 60 million sq ft, but by the end of this year, it could rise 8% to 64 million sq ft.

One bright spot is the fact that the vacancies are declining. Back in the 1990s, vacancy rates skyrocketed to 19%, and in 2009 and 2010, rates peaked at 16.5%. Most recently, however, the vacancy rate dipped to 15.1%. While this is an improvement from past rates, Torto considers this still a relatively high percentage. Barring another recession, however, he expects this percentage to gradually decline in the near future, as shown in the chart.

The number of office vacancies can be tied to the fact that not only have companies downsized their workforce, but also because more Americans are working from home. With a computer, phone, and Internet access, employees can work from virtually anywhere.

“Nowadays, work is what you do rather than where you go, especially if your job is knowledge-based,” Torto says. “About 14% of Americans work at home at least one day a week, and that is affecting the overall demand and supply for office space.”

Nevertheless, work-at-home employees must have a spot to gather and work when they do come into the office. Through what’s called “workplace strategy,” companies are trying to find ways to reduce cost while at the same time attract Generation Y workers, who are 18 to 30 years old.

As a result, the new office buildings aren’t divided into a sea of cubicles surrounded by offices. Instead, developers are rethinking the traditional office design by removing walls and installing benches and open seating areas. This strategy often leads to improved information sharing, communication, and collaboration.

“Firms are redesigning their space from the traditional offices and cubes to something that is much more innovative, open, and flexible,” Torto says.

This concept also accommodates more workers in the same amount of space. As a result, electrical contractors must install more robust electrical systems, higher capacity heating and cooling systems, and larger elevators capable of handling more people.

Bob Gard, president of Aurora, Colo.-based Gard Electrical Contracting, says owners of existing office buildings are also investing in lighting retrofits, and his company is performing these services for its established customers.

“They’re trying to cut down on power consumption by retrofitting inefficient fixtures with LED and T8 fluorescent type lights,” says Gard.

Unlike Torto, who is seeing fewer cubicles and offices in new designs, Gard says some of his clients are trying to fit more cubicles within an existing room by rearranging what’s already in place. For example, his electricians are currently gearing up to work on a small office renovation project, which will add four additional cubicles to an existing floor plan. By moving the cubicles against the wall, the contracting firm will eliminate dead space that features desks but no employees. As part of this project, electricians will drop another power pole from the ceiling to add new circuits and computer hookups for the new cubicles.

“They are going to increase the number of people who are working in that room without changing the size of the room,” Gard says. “This is something that we’re seeing happening across the Denver area.”

Another trend catching hold in markets nationwide is the shift away from traditional office parks. Today’s young workforce prefers a live-work-play environment, which is deeming most office parks obsolete because they are only designed for a single purpose, have a limited number of available parking spaces, and are often located in remote areas far away from the city center.

To circumvent this problem, some developers are opting to transform old industrial buildings with high ceilings and exposed brick into apartments and office space. This type of renovation work is happening in Chicago west of the Loop and in Boston near the Seaport. Other hot spots for office space renovation work include San Francisco, New York, Seattle, and Portland, Ore., which are all coming back to life with newly renovated office buildings, Torto says.

As the office market begins to rise again, developers are trying to find ways to evolve their spaces to meet the needs of today’s technology-savvy workforce. In turn, electrical contracting firms are challenged with wiring new types of spaces and providing the services to accommodate more employees in the same amount of space.      

Fischbach is a freelance writer based in Overland Park, Kansas. She can be reached at [email protected].

About the Author

Amy Florence Fischbach

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