Cranes are once again dotting the skylines of select U.S. cities as office
construction, fueled by rising rents and strengthening demand in the improved
economy, finally awakens from a six-year slumber.
Unlike the scattered build-to-suit projects that marked the early office recovery, lenders and
investors are again rolling the dice on speculative ventures in a handful of
large metros, including San Francisco, San Jose, Boston, Austin, New York — and
especially, Houston.
Spec deals are trending upward across the country as rising rents and receding supply justify new projects. Year-over-year office rent growth held steady at 3.7% in the second quarter, matching the first quarter for the largest increase of the recovery so far, according to data
analyzed by CoStar Portfolio Strategy.
Project deliveries increased by nearly 20% to 47 million square feet over the
past four quarters versus a year earlier. Under-construction volumes have jumped
more than 38% over year-end 2013 levels to 65.4 million square feet through the
second quarter, with the top 10 markets representing almost 70% of total
development activity, according to JLL’s Midyear 2014 Office Outlook.
However, unlike in past cycles, no one is worried about over-building.
“This is by no means a spec-driven supply wave to be concerned about”
from an overbuilding standpoint, noted Aaron Jodka, manager of U.S. market
research for CoStar Portfolio Strategy.
“Spec is no longer a four-letter
word in the office markets where rents justify construction. The issue is, there
are only a handful of markets where that’s the case,” Jodka added.
