After years of record amounts of available space weighing on the national office market, a lack of new construction could portend a shortage of high-quality options.
Elevated borrowing costs and extended work-from-home policies have resulted in a dwindling amount of office space moving through the development pipeline. The phenomenon is expected to result in a sharp drop in completed projects at a time when more companies look for space in top-tier properties across the United States with some aspects of the COVID-19 pandemic in the rearview mirror.
About 22 million square feet of prime office space was under construction by the end of the first quarter this year and is expected to open sometime between now and the end of 2027, according to data from brokerage CBRE. That total equates to the entire amount of high-end office completions for 2021 alone, and half the prime space being developed is already spoken for by tenants.
Only 4 million square feet of top-tier office space is expected to be added to the national office market next year, CBRE reported, less than a quarter of the average annual total reported in the years prior to the pandemic's outbreak in 2020. If the amount of space in high-end buildings taken annually sticks at about 12 million square feet more than is given up, the lack of new construction would help drive the vacancy rate for prime properties down to a little more than 8% by 2027, according to CBRE.
"This absorption estimate is conservative, and the prime vacancy rate could return to its pre-pandemic level sooner given continued job growth and a smaller share of renewals as the economy improves over the next year," the report's authors wrote.
The report analyzed 830 prime office buildings — spaces built or extensively renovated in the past decade and with what it considers high-quality design features, wellness standards and amenities — totaling nearly 340 million square feet across 57 U.S. markets. Those top-tier properties account for about 8% of the total national office market in terms of square footage and just 2% in terms of building count, according to CBRE.