are we overbuilding?

Over 700 MSF of New Office Under Construction

Across the globe, an unprecedented office building boom is underway with more than 700 million square feet (MSF) of space under construction that will deliver between now and the end of 2019, Cushman & Wakefield’s Global Office Forecast reports. That’s the equivalent of recreating five cities worth of office inventory – Washington, DC, Dallas, London, Singapore and Shanghai – over the next three years.

The report details economic drivers, supply and demand forecasts and prospects for rent growth in more than 100 cities around the world.

Although demand, as well as job growth, will remain healthy through 2019, totaling approximately 520 MSF, it will fall far short of supply, which will cause vacancy to rise in most cities around the world. From that perspective, the world is overbuilding.

Or, not. It also has been abundantly clear throughout this global expansion that most occupiers generally favor new, high-quality office space over older, Class B and C product. In the U.S., for example, newly built high-quality space has accounted for 65% of all office absorption since 2012. More often than not, developers have been rewarded throughout this cycle for delivering prime product, even in markets where vacancy is elevated. Additionally, the combination of an accelerating global economy with low interest rates is a recipe for healthy office-demand conditions.

“Developers are certainly placing some big bets on new product, but the bulk of it is concentrated in the major global cities, which is precisely where the greatest appetite is for these shiny new buildings,” said Kevin Thorpe, Cushman & Wakefield Global Chief Economist. “I’m less concerned about the new space leasing up, because in a sense, that is supply rushing to meet demand. It’s giving tenants exactly what they are asking for. I’m more concerned about what this wave of supply means for lower-grade product, which I suspect will have a difficult time competing.”

The development boom will be led by Asia Pacific, particularly Greater China. In fact, nearly 60% of the world’s new construction will be concentrated in the Asia Pacific region. Within the region, new supply is concentrated in a handful of markets: Beijing, Shenzhen, Shanghai, Manila and Bangalore. Indeed, those five markets account for 55% of construction taking place in Asia Pacific and over one-third of construction worldwide. Much like the supply side, the demand side of the equation is strongest in Asia Pacific. Beijing will have the distinction of leading the world in both supply and demand growth.

The Americas region is also in the midst of a robust construction cycle, peaking in 2017 and tapering offer somewhat in 2018 and 2019.  . Still, the U.S., Canada and Latin America will all build more space than they will absorb over the next few years. Again, it varies greatly from one city to the next, and the bulk of new space is concentrated in the largest cities, many of which arguably need it the most.

The development pipeline also is ramping up throughout Europe, but not nearly to the same degree. Some European cities, such as Paris, Vienna, London and Brussels, will hit a cyclical high in terms of new construction over the next two years, while Madrid will show steady growth amidst global deceleration of rental-rate growth. Then again, those same cities report vacancy rates that are lower than pre-recession levels.

“Broadly speaking, supply and demand seem to be the most balanced in Europe relative to the other global regions,” Thorpe said.

Boston Key Facts

  • Greater Boston tenants clearly prefer new construction.
    • Availability in buildings constructed prior to 2000 was 13.0% at the end of the second quarter.
    • Availability in buildings constructed after the turn of the century was 8.3%.
  • The majority of recent negative absorption in the city of Boston is largely attributable to tenants moving into new construction:
    • Boston Consulting Group space at 1 Beacon Street and 53 State Street (150,000 SF in total)
    • Sapient (Digitas) space at 131 Dartmouth Street (80,000 SF) and 33 Arch Street (175,000 SF)
    • Partners Healthcare space at 1 Constitution Center and 500 Washington Street (200,000 SF in total).
  • New construction has ignited an arms race for amenities in existing buildings – office space is becoming an increasingly important recruitment tool and the list of downtown tenants opting for new construction continues to grow.
    • 53 State Street unveiled a newly renovated roof deck in the third quarter of 2016.
    • At 100 Federal Street renovations are underway for an enclosed street‐level plaza that will include a winter garden.

About Cushman & Wakefield

Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 45,000 employees in more than 70 countries help occupiers and investors optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. 2017 marks the 100-year anniversary of the Cushman & Wakefield brand. 100 years of taking our clients’ ideas and putting them into action. To learn more, visit www.cushwakecentennial.com, www.cushmanwakefield.com or follow @CushWake on Twitter.