Per National Real Estate Investor, a report by Cushman & Wakefield states that office construction could start slowing down in 2019. This could be fueled by increasing construction costs, uneasiness about the current real estate cycle and zoning issues. According to Construction Dive, the present market is strong and the first two quarters of 2018 brought in more than 28 million square feet of new office space. By the end of the year, we should see a total of 68 million square feet of new space. This is an improvement over last year. In the second quarter of 2018, 60% of new construction office space was leased by the time of completion with half of the space that is presently under construction already under contract. The percentage is even higher in markets such as in the San Francisco Bay Area.
We could see a dip next year of about 55 million square feet of total delivered office space. This is happening already in Miami-Dade and Palm Beach County in Florida where vacancy rates are rising. Brooklyn, New York has already seen absorption rates climb. It would take 10 years for the market to absorb the 2.5 million square feet of office space that is under construction now. Other segments of the industry could take the place of office construction. Research and Markets showed the global data center construction market which was valued in 2017 at $43.7 billion, could increase to $93 billion by 2025 in North America.
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Diversification seems to be the best bet for most contractors at times like this. As long as you diversify, you will lessen your chances of having a downturn in any one market have much of a negative impact on your business.
Per The Real Deal, forecasts by Cushman & Wakefield call for 20% less square footage hitting the market next year due to rising costs and end of cycle anxiety. In Chicago, the office vacancy rate downtown was 13 percent at the end of the second quarter even with the addition of more than 1 million square feet of new office space.
According to Urban Land, the global chief economist at CBRE, Richard Barkham, stated that the economy and commercial real estate market will show slower growth in 2019. After 10 years of exceptionally low interest rates, rates are expected to rise higher over the next two years. This rising interest environment in a global market where there is still quite a lot of debt, could produce a big downside risk after mid to late 2019. Barkham stated that 10 year Treasury rates are forecast to climb to 3.4 percent in 2019 and remain at that level in 2020. There is still uncertainty as to how markets that have lived with extremely low interest rates for the past decade will react to a rising interest rate environment.
Industrial/warehouse space availability remains steady for now. The vacancy rate is expected to hold at 7.4 percent for the third year in a row before going higher to 7.5 percent in 2019 and 7.7 percent in 2020. Office vacancies are expected to inch higher in 2019 to 13.2 percent and to 13.4 percent in 2020.
Whenever you are dealing with predictions, there are always so many variables involved. Rising construction costs, land construction and labor costs are going up in almost every market around the country. Martin Stern, senior managing director at CBRE summed it up very well. He stated that construction costs are a big concern but other factors such as U.S. policies related to trade and immigration could also have a major impact. Stern said "If everything breaks the wrong way on those things, we're going to see a bigger impact on new construction than what we are thinking about."
To end on a positive note, higher construction costs also are creating huge opportunities for value-added projects for well located properties that can be renovated or repurposed. Stern said, "I think we are going to see more and more in retail, housing and even office in repurposing buildings for additional and better uses because it will be a cheaper way to deliver the right product."
