In February, JE Dunn, a Kansas City, Missouri-based construction firm, broke ground on a 677-foot-tall office tower in downtown Omaha, Nebraska.
The $600 million project, which will be the new corporate headquarters for insurance company Mutual of Omaha, includes 800,000 square feet of office, meeting and amenity space. Once complete, the skyscraper will be the tallest building in Nebraska.
But while some massive office projects continue to break ground, economists say activity hasn’t returned to pre-pandemic levels, and won’t anytime soon. Dodge forecasts total office construction starts to tumble 6% to $37 billion in 2024, according to a recent Dodge Construction Network webinar.
Economists expect core office activity to erode further
Office vacancy sits at around 18%, said Branch. That’s about 140 basis points higher than a year ago and trending higher, he added.
“[That’s] going to continue to put extreme pressure on the spec side of the market,” said Branch. “We think that market continues to decline in 2024.”
The speculative office construction market represents a significant portion of office activity — 65% by dollar value, said Branch. Speculative office construction involves building office space before securing a tenant lease.
Yet, while economists expect speculative office construction to taper off, other forms of office construction will continue to prop up overall activity in the sector, according to Dodge data.
For example, alteration-type projects are on the rise. These projects include any change to an existing building that affects usability, such as remodeling, renovation or rearrangements in structural parts.
Recent office alteration projects include Boston-based Shawmut Design and Construction’s transformative repositioning project on a 100-year-old building at 712 Fifth Ave in New York City, and Providence, Rhode Island-based Gilbane Building Co.’s $500 million modernization project for insurance giant Northwestern Mutual in Milwaukee.
Alterations historically represented about 30% to 35% of total office activity, according to Dodge. However, over the past two years, these project types have reached closer to about half of total office activity, said Branch.
That means new office construction is even worse than what the overall sector data suggests.
“If you were to take alterations out of that market and just look at new activity, it’s pretty weak in 2024,” said Branch during the webinar. “If you were to see our square footage data, the level of office construction starts in 2024 is at a 10-year low.”
Corporate campus projects break ground
Nevertheless, Branch expects a resurgence in corporate campuses, or owner-built projects. While these owner-built office campuses represent just 10% of total office activity, Branch said he’s “seeing a slight uptick in activity” among these project types.
“I don’t think the data is there yet to tell us exactly why,” said Branch. “But I do expect those corporate campuses to pick up a little bit of strength again in 2024.”
For instance, in addition to the Mutual of Omaha skyscraper in Nebraska, real estate data giant CoStar Group also broke ground on its $460 million research and technology center in Richmond, Virginia. The 26-story, 750,000-square-foot office will be the second-tallest building in Richmond, according to a company press release.
But again, those corporate projects represent just a fraction of total office activity.
“In our five year forecast window, the office market, in our estimation, never gets back to where it was in 2019,” said Branch. “We continue to believe here that remote and hybrid is going to continue to be a driving force in the employer-employee relationship.”