Office construction decline nears end

August 11, 2010

The office market is nearing the bottom of its 2008-10 construction decline. Office construction spending dropped 32% in the 15 months through December—with a nominal 6% drop expected by summer—but office construction spending was steady over the final four months of 2009.

Early reports suggest that office space absorption turned surprisingly positive at the end of 2009 due to a burst of leasing within the Boston-Washington corridor. These recent positive signs are not enough to signal the end of the downturn, however. Office completions will add space that's expected to exceed demand—at least through midyear.

This office recession is milder than the one a decade ago because there was less overbuilding in the 2005-08 building boom than during the expansion that preceded the last recession. Additionally, the decline during this recession has been entirely in private office space. Spending for government offices rose 24% over the same period, much of it funded by stimulus money.

The value of office starts reported by BD+C trended higher in the last half of 2009, gradually refilling the construction pipeline that shrank sharply in the previous nine months. Private office starts are now 11% below a year ago but the decline reached nearly 50% last summer. Government office starts are now 14% higher than a year ago.

Office Vacancy Rates

Lowest vacancy rates, Q4, 2009
Source: Property & Portfolio Research

Honolulu 12%
Washington, D.C. 14.4%
Norfolk, Va. 14.5%
St. Louis 15.5%
New York City 15.8%
Highest vacancy rates, Q4 2009
Detroit 26.5%
Riverside, Calif. 26.5%
Atlanta 25.9%
Palm Beach, Fla. 24.9%
Tampa, Fla. 24.1%



Office construction recovery will be strongest in markets dominated by government, technology, and professional jobs, while recovery will be relatively late and weak in markets dominated by finance, housing, and hospitality.—Jim Haughey, BD+C economist.

         
 

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