Major companies are increasingly committing to new office developments because the supply of top-quality space remains limited in some major U.S. markets.
The trend is helping restart a small amount of office construction after years of high vacancy, expensive financing and weak development activity. In Chicago, for example, law firm Sidley Austin agreed to anchor a planned 45-story tower in Fulton Market, helping move forward the city’s first new office skyscraper in more than six years, according to CoStar.
The deal reflects a growing divide in the office market. Many older buildings continue to struggle with vacancies, while demand for newer, well-located properties is pushing rents higher.
Companies Are Running Out Of Top-Tier Options
About 49 million square feet of office space is currently in the U.S. development pipeline. Around 30 million square feet was completed nationally over the past year, less than half the long-term average.
Yet companies looking for large blocks of high-quality space in cities such as New York, Miami, Chicago and Washington, D.C. can face limited choices. That scarcity is giving landlords of newer buildings more leverage. Companies are also increasingly willing to commit to projects before construction starts to secure the space they want.
Big Leases Are Helping Finance New Buildings
Large tenants have become important catalysts for office developments.
American Express recently began construction on a roughly 2 million-square-foot tower at 2 World Trade Center in New York. Citadel and Santander are also anchoring major Miami developments, while companies including Deloitte and Simpson Thacher have committed to large blocks in New York projects.
These agreements give developers the preleasing needed to make financing possible. They are also supporting much higher rents at the top of the market. In Chicago, Sidley is expected to pay more than $115 per square foot for its planned space, compared with roughly $70 per square foot for previous top-of-market deals, according to people familiar with the transaction.
Construction Still Has A High Bar
The new projects remain exceptions rather than signs of a widespread office-building comeback.
Lenders are demanding stronger financial commitments, and developers often need to prelease at least half of a building before construction can begin. Projects also need strong locations, experienced sponsors and rents high enough to cover today’s construction and financing costs.
That means most proposed developments still will not get built.
For cities with limited supplies of high-quality office space, however, a handful of major tenants can change the economics of a project. The result is an increasingly divided market, with newer buildings attracting significant investment while older properties continue to face pressure from vacancies and changing tenant demand.
