Charlotte, Austin lead the way for new deliveries
Despite unknowns stemming from work-from-home trends, a slowdown in new leasing, declining job growth and an uptick in real interest rates, the pipeline for the office asset class remains viable, according to a new report from CommercialEdge.
Nationally, approximately 153.8 million square feet of Class A+ or Class A product is under construction, and another 10.3 million square feet of Class B is underway. There are no Class C projects in the works.
CBDs have a total of 34.4 million square feet under construction, with urban areas totaling 79.6 million square feet and suburban office product construction clocking in at 50.4 million square feet.
Charlotte and Austin are leading the pack for new office stock, with Charlotte showing the highest level of square feet under construction as a percentage of stock (11.5%) and Austin not far behind at 10.8%. Together, the two cities account for nearly 10% of all new office square footage under construction. Both markets have experienced explosive growth over the past few years, particularly thanks to domestic in-migration and a growing number of relocations by financial firms from urban centers like New York City.
Last year saw the delivery of 67.6 million square feet of new office, even as stay-at-home orders halted development during the second quarter. Those new projects were almost exactly split between suburban (32.2 million square feet) and CBD/urban submarkets (35.4 million square feet).
These numbers are in stark contrast to recent dire projections about the future of the sector, most recently from Green Street, which predicts office demand will decline by up to 15% post-pandemic. In a recent report, the firm forecasts that the average daily occupancy of office may fall as much as 20%, especially if “hot desking” and shared arrangements continue to accelerate in popularity. Green Street also predicts that a rise in real interest rates will dampen value in the sector, since longer lease terms function as a relatively ineffective hedge against inflation. And if supply grows faster than expected, rent growth will also decline.
Source: “Office Pipeline Still Alive Despite COVID-19“