Engineering Inc - March/April 2018 - 6

After Years of Growth, Office
Construction Projected to Decline
By Gerry Donohue

n recent years, the office market has been one of the most
robust sectors in the engineering industry. However,
growth in this sector will continue at a more measured
pace for the next few years.
From 2014 to 2016, construction put-in-place in the
office market grew at an annual rate of 21 percent, rising
from $39 billion annually to more than $67 billion annually. The pace slowed in 2017, but the sector still grew by
a hefty 9 percent. According to FMI's Construction Outlook 3rd Quarter 2017, the office market sector will grow by 9 percent again in 2018,
but then there will be a gradual tapering off over
the next years to just 2 percent annual growth
in 2021.
Two factors will contribute to that growth in
the short term. First, the national office vacancy
rate remains steady, around 13 percent, which
suggests a stable relationship between supply and
demand.
Second, job growth continues to be strong.
"Job growth is the key to office developments,"
says Roy Wilshire, senior vice president at
Kimley-Horn in Dallas. "When you have new jobs coming into
an area, that produces demand for office space."
Looking behind those numbers, a severely bifurcated market is
revealed. FMI's data shows urban markets performing well while
suburban and rural markets are lagging. The downtown vacancy
rate is 10.6 percent compared with the suburban rate of 14.1 percent. Furthermore since the Great Recession, the 100 largest U.S.
metropolitan areas have added 6 million jobs while rural areas still
have fewer jobs than in 2007.
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ENGINEERING INC.

Another indicator of the strength of urban markets in 2017,
40 percent of new office square footage came from office projects
with six or more stories, which tend to be in downtown areas.
During the prior peak in office construction in 2007, only 22 percent of new office square footage came from high-rises.
Among urban areas, New York City and the San Francisco Bay
Area stand out as both the largest and the strongest markets, followed by Washington, D.C., Dallas and Atlanta.

In 2017,
40 percent
of new office
square footage
came from
office projects
with six or more
stories

MARCH / APRIL 2018

DUTCHY / GETTY IMAGES

MARKETWATCH

STRONG SEGMENTS

Many of the market segments that have been
strong in recent years continue to do well,
including corporate relocations and data centers.
"With the growth of the cloud, we're seeing a lot
of activity in data centers," says Wilshire.
Wilshire says Kimley-Horn is also doing a lot
of work in "mixed-use walkable environments"
that include an office component-especially
those built around transit locations."
Angie Lee, global workplace leader at Stantec
in Chicago says one of her firm's fastest growing
markets is office building repositioning. "A landlord will have a Class C or B- asset and they want to bring it up to
Class B or B+ to attract the next generation of tenants," she says.
"In some instances, we take the building down to the structure
for full repositioning. In others, we focus on refreshing such as
upgrading the entry and lobby and adding amenities."
The advent of shorter leases has also resulted in more work for
engineering firms, says Lee. "We rarely see 15-year leases anymore.
Instead it's five to seven years. That churn has created a steadier
market and is a good way to weather the cycle."

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