New Office Construction Commands 64% Rent Premium

New construction is commanding a significant rent premium of 64% over average Class A submarket rents, and 20% over existing top-tier trophy assets, according to a construction report issued Friday by Cushman & Wakefield, surveying 24 select office projects currently under construction in 12 major US markets and Toronto. 

“Tenants are demonstrating a strong bias for the highest quality, newly constructed office projects across major US and Canadian markets—they are looking for a fundamentally different, elevated, office experience,” Rebecca Rockey, Cushman & Wakefield’s Global Head of Economic Analysis & Forecasting, said in prepared remarks.

“These modern buildings built for today’s employees offer a platform for companies to enhance culture through a shared workplace experience that can’t be replicated at home.”

Cushman & Wakefield is forecasting 48.5 million square feet to deliver in 2022 and 25.6 msf to deliver in 2023. Delays are factored into these forecasts. Key delivery dates continue to get pushed back as materials are delayed and wait times creep up due to pandemic-driven supply chain issues. 

“Even though office construction has come off its peak, it is still at 1.8% of inventory and the historical, pre-pandemic average is 1.3%,” Rockey said. “Just 10 cities account for over 55% of all construction. It’s not unusual for this kind of concentration to exist, but it does suggest that office supply is not a unilateral risk and depends greatly on local conditions and dynamics.”

Office Developers Still ‘Figuring Out’ Return-to-Office Needs

Peter Curry, real estate practice partner, Farrell Fritz, tells GlobeSt.com that the planning process and land use approval timetable for office buildings that are coming online in 2022 and 2023 “almost certainly” commenced prior to the pandemic.

“Even pre-COVID, developers were trying to figure out what amenities new office buildings would include,” Curry said. “The builders that are completing these new projects must have decided on what innovative designs would attract prospective tenants, and built accordingly.

“Even so, they probably made some adjustments mid-construction to respond to the pandemic. I anticipate a slowdown in planning and designing new ground-up projects, as developers (and their lenders) try to figure out what will bring tenants, and tenants’ employees, back to offices.

Curry said that “front and center will be state-of-the-art air filtration systems, energy savings infrastructure, and a retreat from open-space planning. But they will also need to help tenants adapt to an employee base that will almost certainly work remotely for part of each work week.”

Paul Rahimian, CEO and Founder of Parkview Financial, a private lender that specializes in construction financing, tells GlobeSt.com that his company is very bullish on office product in major MSAs. “Despite numerous reports of the abandonment of office due to lifestyle changes after COVID-19, we still believe in the office sector and its future.”

Rahimian adds that the company has recently approved multiple construction loans for ground-up office buildings in various locations—including Denver, Miami and New York. “As we continue to pursue quality loans for construction projects throughout the United States, we anticipate providing more funds for the construction of new office buildings.”