Construction’s Effect On Commercial Real Estate

Construction’s Effect On Commercial Real Estate

As in any industry, a product’s availability causes a natural friction between cause and effect within their market. For commercial real estate, the amount of office space, both available and occupied, can cause lease rates and occupancy percentages to fluctuate. Over the past year, construction has had a dramatic drop nation wide. With only 56 million square feet of development during 2011, construction development has shown to be at the lowest level of construction for office space since 1960 (reported by McGraw-Hill Construction).

Some of the targeted variables for the decrease of construction were highlighted by The Wall Street Journal earlier this month. Such details were described as….

• SLOW SPEED AHEAD | Due to low vacancy rates sitting at a 17.2% at the end of 2011, construction’s level had no reason to speed up. With no strong demand in the market, the need for more production is currently a small one and doesn’t look to pick up speed anytime soon.

• INCREASE OF JOBS | Though the economy added 243,000 new jobs in January, the overall recovery for the market is still moving slowly and is estimated to take a few more years before vacant office spaces will be filled.

• CUT IN COST | In addition to the amount available out in the market, companies leasing the spaces have also cut cost in the amount of space needed by packing employee work areas closer together, thus reducing their overall office space leased and are putting off long-term leases in new office buildings.

• IF HISTORY REPEATS | Through past cycles where construction levels were low and the market began to recover, any vacancies available were quickly absorbed and caused a fast and large increase in office space demand. Such a cycle occurred in the early 1990s following a drop in construction levels, lease rates increased more than 12% a year for four straight years following within the top 50 metropolitan areas. Another example showed rates jumping to over 30% between mid-2006 and mid-2007 after construction decreased year after year due to the 2001 recession.

• THE OFFICE-SPACE PARADOX | Regardless of historical patterns found in past market cycles, banks continue to remain strict on their guidelines and conservative in their funding. Now, in order for construction projects to be funded, banks often require pre-lease agreements as much as 50%, prior to breaking ground. In addition, banks are also requiring developers to fund up to half of the production cost.

Overall, in order for construction to continue and eliminate the possibility of a lease rate increase, developers need to build while banks need to lend. Neither can occur without a strong market demand, however, without increase in office space lease agreements the demand is not a pushing factor. Even then, to build a commercial real estate building often takes years to complete, which in turn, would still cause a high jump in lease rates during the interim due to the lack of office space available.

Knowing the market equation of… the more jobs created = the more office space needed. The more office space is occupied = the higher the rates will increase…is a crucial part of managing one’s commercial real estate property correctly. Being able to strategically place the needs of the property and its’ office space tenants is what ORION does best. Year over year, their unfailing leadership in Orange County office space for lease has successfully powered through all various cycles of the market. For ORION and their clients, tenant representation is key, ensuring that all details needed in order to make a successful business transaction is given and advised based off of a collaboration of reports (past, present, and forecasted future), knowledge, and industry experience. When it comes to black and white results for commercial real estate in Orange County, ORION Property Partners are the leading professionals in office space for lease.


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