With construction cranes crowding the downtown skylines in the San Francisco Bay Area, New York City, Seattle and other large CBDs, office developers and investors may do well to branch out into markets and submarkets where competition with other projects isn’t so keen and the barriers to entry aren’t as daunting.
“There are many markets out there that are late-recovery plays offering significant rent upside and limited risk from new construction,” said Walter Page, director of research, office, CoStar Portfolio Strategy, during a webinar presentation titled “From the Ground Up: Late-Cycle Development Strategies,” presented with Hans Nordby, managing director of CoStar Portfolio Strategy, and managing consultant Lee Everett.
Certain downtown and suburban submarkets within former housing-bust metros such as Sacramento, Phoenix, Orange County, the East Bay of San Francisco and even the San Fernando Valley submarket in Los Angeles are still only seeing a fraction of their pre-recession construction levels. Tampa, Atlanta, Austin, Miami, Washington, DC; and Boston continue to lag below historical norms for new supply.
While developers haven’t been building at the feverish clip of the previous cycle, the uptick in interest in development among core and value-add funds, plan sponsors and foreign investors, especially from China, has been tangible in the first three quarters of 2016.
“Never before have we seen such a diversity of our clients interested in either building development or lending on that construction,” Nordby said.
The long office supply lag in these late-recovering metros could finally bring development opportunities in the submarkets of such secondary markets such as downtown Milwaukee and suburban Tampa, the CoStar analysts said.
“If you’re looking to build, it may not be as bad a time to start now as you may think,” Nordby said, citing investment sales, rent growth and occupancy growth in many markets which in many cases exceeds their historical averages since 2000.
Overall U.S. office supply addition has been muted throughout the recovery. Despite pockets of strong building in Silicon Valley, San Francisco, New York, Seattle, Dallas and a few other top markets, total projects under construction currently make up just 1.5% of U.S. office inventory, well below historical trends, with just 36% of metros seeing more new office space entering inventory than their long-term averages.
In fact, overall office construction, which has remained flat for more than 18 months, now appears to trending down, Nordby said. By comparison, 79% of metros currently have apartment construction levels above their average since 2000.
Pent-Up Suburban Demand Could Bring Opportunity
At the same time, the share of U.S. office construction projects in downtown districts versus suburbs is picking up significantly, currently at 38% of all office construction. Suburban office development has fallen in recent quarters, now totaling about half the 250 million square feet under construction in the suburbs at its peak in 2000.
With brisk levels of office construction already underway in the top coastal markets and CBDs, this slowdown in suburb supply may be a window of opportunities for well-informed and savvy developers.
Suburban markets such as Tampa and West Portland, OR, are looking like an increasingly good bet for investors based on rising occupancy, lower rents, pricing upside and the virtual absence of construction compared with history.
Suburban office product is also getting more sophisticated based on tenant feedback. Version 2.0 of the suburban office park includes single-tenant office buildings outfitted with larger, more open floorplates and higher parking ratios. For example, a 150,000-square-foot building developed for GoDaddy in Tempe, AZ, has a whopping 6.7 parking ratio for its 1,350 employees, who are occupying fewer square feet per work and enjoying perks such as a yoga room and indoor go-cart track.
Spec Resurfaces In Suburbs
Investors are taking their next step into speculative development since the recession in markets with a growing shortage of available space for large tenants. For example, in Tampa, Vision Properties — which in February acquired Renaissance Park, a five-building, 573,053-square-foot master-planned suburban corporate office campus north of Tampa International Airport — vowed eight months ago to consider developing an office building on a four-acre vacant site in its new acquisition without a tenant in tow.
To read the full article visit, CoStar
