Economist's Commentary: March 25, 2008
New Office Supply Defies Logic in Some Markets
By Scott Ian MacIntosh, Senior Economist, Commercial/Investment Real Estate
Virtually every office market has some degree of new construction with a 2008 delivery date. It may be somewhat surprising to discover that not all of this new space is being built in markets where demand for office space is soaring. While it can be argued that the demand for new space is the result of the "flight-to-quality" it is still true that lag time exists when older Class B and C buildings are vacated as tenants relocate to newly completed office buildings. It must also be remembered that a typical high-rise office building normally has a construction period of 2 years or more. Once the first shovel is in the ground, there is usually no turning back.
Some markets seem to be absorbing the new space. Almost 8.0 million square feet of new office space is being constructed in the greater Washington, DC area. All of this space will be delivered by the end of 2008. There is sufficient demand for such space as evidenced by the anticipated modest increase in the vacancy rate. In other markets, the pace of new construction is not being matched by the demand for office space. Austin, San Jose and Las Vegas are examples of markets where a significant supply of new office space is expected to come on-stream this year, but where demand will not follow suit and vacancy rates are expected to jump as a result.
A market like Dallas, where the current vacancy rate of 21.4% is the highest in the country, will see a slight decrease in vacancy by the end of this year, even with an additional 2.9 million square feet of new supply. Fortunately the demand for office space in the suburban Dallas market is growing, otherwise the vacancy situation would be considerably worse.
Based on national aggregates it would appear that the national office market has avoided a serious overbuilding situation. However, when examined on a market-by-market basis, there is some potential for increased new supply and period of catch-up that will be occurring in some office markets.
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