Why 2017 will be the year of office construction
There's no denying it: Office construction in the U.S. is on the rise and will be for the foreseeable future. From the proposed tallest office-only skyscraper in Chicago since 1990 to the new Marriott headquarters planned for downtown Bethesda, MD, companies are getting to work in their quest to attract new employees in areas with robust economic growth.
Dodge Data & Analytics predicted in its 2017 Dodge Construction Outlook that office construction starts would finish 2016 9% higher than in 2015, primarily due to a few megaprojects in New York City, but would surpass that mark for 2017 with 10% more construction starts, or 110 million more square feet than in 2016.
In fact, Dodge predicted the office sector will see the strongest surge in starts of any other segment of commercial construction this year.
Alex Carrick, chief economist for ConstructConnect, said he expects an 11.3% uptick in private office construction starts in 2017, or $20.5 billion. "The cycle seems to be pretty strong," he said, reminiscent of 2007 and 2013 peaks.
Experts explain that demographic preference and employment factors are playing a role in the expected rise in the office sector this year, as well as creating a shift in office design trends.
Why office demand is on the rise
Carrick said the sector's growth is being driven by office-based employment, which saw a 1.5% increase last year. Job growth in professional business services, accounting and bookkeeping, architectural and engineering services, computer design services, telemarketing and customer service call centers are all driving the need for more office space, according to Carrick.
But there's more to the story than just the numbers. It's also about the "why" of the cities in which companies are choosing to build and the "who" they're trying to attract.
Long gone are the days when downtown workers scurried home to the suburbs, according to John Dempsey, principal of commercial development company CA Ventures' CA Office division. Workers are skewing younger, and millennials often prefer a downtown, walkable lifestyle — a trend that has not gone unnoticed on the part of employers.
"In Chicago in particular, you've got tremendous neighborhoods, and [millennials] can enjoy this community of youth in downtown," Dempsey said. "They work long hours, but right outside is this other life."
Empty nesters, who once had that same vibrant, urban lifestyle and are now relieved of child-rearing responsibilities, have also begun making their way back to downtown, he noted.
Growing popularity of urban areas
The key to this draw is walkable neighborhoods with access to public transportation. These areas are where many employers have set their sights for new office construction. "You won't see the same surge in other locations that don't have that," Dempsey said.
Carrick added that cities now have more green space and more family-friendly features than they used to, in large part due to efforts of urban planners who recognized the "symbiotic relationship" between jobs, mass transit and strategically located residential development.
These locations, Dempsey said, also have the benefit of being able to serve those who desire a more pastoral environment. "With good transportation, [employers can] encourage a workforce from suburbia," he said.
"Even the stodgiest of companies have said they have to change their ways."
Principal of CA Ventures' CA Office division
Dempsey noted that the upswing in office construction isn’t limited to urban areas only. Suburban "life centers" he said, are also drawing their share of the market. Not too far from major metros are urban-like enclaves that mimic the village and community qualities of their more populous counterparts.
Carrick said it will be interesting to watch millennials as they begin to start their families. A common prediction is that they will head to the suburbs just as their predecessors did. In Dodge's 2017 forecast, Chief Economist Robert Murray said the industry, which has been focused on major metro activity, should "keep an eye on" office construction in the suburbs.
However, because of the positive shift in downtown environments, Carrick said he doubts the out-migration will be as pronounced as it was in the past.
And it's not just the usual suspects of New York, Chicago and San Francisco when it comes to office site selection, either. Cities like Nashville, TN, and Raleigh, NC, are "having their moment" and attracting corporations so that they can take advantage of fresh crops of graduates from local universities or young professionals who might not want to relocate just yet, according to Chris Muoio, quantitative strategist at the Ten-X research team.
These same cities are also attracting workers from more expensive metros because, although there is robust job growth, they're not yet seeing the commensurate hikes in the cost of living.
Shifting trends in office design
The trend toward a more community-based lifestyle, Dempsey said, has trickled down to office design as well. Businesses are consolidating their floorplans and looking at office space "as a tool rather than a birthright."
When businesses need more room, they're now more prone to horizontal expansion rather than vertical growth. "They don't need one person in one work station when they’re on the road most of the time," Dempsey said.
He noted that it's more common today for office space to be designed to enhance communication and sharing among coworkers, which results in getting work done faster. Dempsey said that no one has the time or finds it necessary to search for an answer across several floors of operations or wait for an email or a phone call. "Line of sight is very important these days," he said.
When it comes to the contractors building all this new office space, Dempsey said he hasn’t seen any problems with those in the office sector being able to handle the work. But when the market gets busy, developers benefit by having a proven group of contractors in the pipeline, he noted.
Predictions for the future of the office sector
Experts forecast that office construction will stay on its upward path at least into 2018, although Carrick said a "shift in swing of the pendulum" is always possible over the next decade or so.
Dempsey said one thing is for certain: Today's workers are demanding Class A office space that promotes a collaborative, comfortable working environment. "Even the stodgiest of companies have said they have to change their ways," he said.
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