Robust Office Preleasing Highlights New Buildings’ Appeal

Even with Amazon holding off on several office projects as it chooses to reevaluate the designs to suit hybrid work, the second half of the year should be a strong one for new office development, according to Allyn Thorpe, senior research analyst, Colliers, in a report issued this week.

Perhaps more importantly, Thorpe said that preleasing activity, a leading indicator of construction demand, remains strong. Of the 50.1 million square feet of developments under construction, 59% of it is pre-leased.

Colliers has the technology industry accounting for 46.9% of the 29.5 million in pre-leased inventory.

Brand-New Office Buildings Incentivize Hiring

Adam Showalter, managing director of national office investor services for Stream Realty Partners, tells GlobeSt.com that new office inventory is poised to almost double in the second half of 2022 and will continue double-digit growth in the coming 24 months.

“The flight-to-quality trend has significantly accelerated in the past 18 months as the war for top talent has forced employers to use physical real estate as a recruiting tactic,” Showalter said. “If existing employees are considering changing jobs, the employer can offer a pay increase and a shiny new office with endless amenities. 

“When a prospective employee is considering a virtual job or a hybrid role in a vintage, central CBD office building with limited amenities and little natural light, a prospective employer can offer a brand-new building in a trendy submarket with endless amenities inside and outside the building. 

“The looming recession will shift the leverage back to employers, but that shift will take time before occupiers start considering saving 10% to 30% on office rent at risk of losing human capital.”

Flight to Quality an Increasing Trend

Petra Durnin, head of market analytics at Raise Commercial Real Estate, tells GlobeSt.com that as companies re-evaluate how they use office space and navigate ever-evolving hybrid workplace strategies, one of the increasing trends is a flight to quality and the best quality typically comes from new construction.

“New construction can offer a competitive advantage to companies looking to attract and retain quality talent,” she said. “Despite rising vacancies, there is still a need for highly amenitized, tech-forward new office space to meet the needs of a hybrid workforce to effectively collaborate in person and build culture.”

Doug Ressler, manager, business intelligence, at Yardi’s CommercialEdge, tells GlobeSt.com that new supply, despite the current uncertainty, has seen over 26.5 million square feet of new office space broken ground this year. The San Francisco metro contributed more than half of that number.

“Despite higher vacancy rates, companies that are rightsizing are driving the demand for top-shelf Class A offices, creating a competitive market for these premier spaces,” Ressler said. “With COVID’s impact diminishing (at least for now), touring activity has picked up as many prospective tenants are looking at more open-office creative spaces instead of the more traditional office floor plans.”