Office Construction Rebounds as Other Sectors Slip

Last year closed in a “volatile” state for construction, with office sector construction rebounding as other property types declined, reported Reis, New York.

Reis Economists Hsiao-shan Yang and Thomas LaSalvia noted new completions declined for all sectors except the office sector, which rebounded from the third quarter’s sharp decline. 

“The office sector, marked with relatively higher fluctuation from quarter to quarter, reflects developers’ uncertainty in the sector coming from a transition in the U.S. economy that has led to more jobs being geared toward producing services and an increase in technology that has allowed employees to work remotely,” the firm’s Construction First Glance report said.

Though apartment completions declined for the year, 2018 deliveries remained the second-highest since at least 1999, Reis said. The high completions increased the multifamily vacancy rate slightly to a still-healthy 4.9 percent.

“Despite high completions, the strong job market has resulted in robust [apartment] demand and net absorption has remained strong,” the report said.

Office sector inventory growth has remained relatively flat since the Great Recession, the report said. The annual new construction figure registered at 43.6 million square feet, still below pre-recession levels, the report said. “This latest figure represents a quarterly rebound for office construction as it rose 20 percent from last quarter, while other market fundamentals were more subdued,” the report said.

Developers remain hesitant to introduce new retail assets given the uncertainty in market fundamentals, Reis said. “[Retail property developers] are affected by the store closings and structural changes caused by the industry transitions occurring,” the report said.

As a result, quarterly figures for new retail property completions continue to fluctuate, Reis reported. The sector saw 8.19 million square feet of total completions last year, down 43 percent from the 14.5 million square feet of completions seen in 2017. But the retail vacancy rate still rose 20 basis points year-over-year to 10.2 percent due to various store closings. Without strong demand, asking and effective retail center rents grew just 0.4 percent during the fourth quarter.

“For the office and retail sector, fluctuations and a long-term slowdown signals hesitation due to uncertainties in those markets,” the report said. “Market participants might be cautiously waiting to see if the economic conditions and job growth can stay strong enough to allow these markets further developing opportunities.”