April 19, 2018

'Spec' Office Construction Back in Demand

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'Spec' Office Construction Back in Demand

As the office recovery broadens, more lenders and investors are banking on speculative ventures in a handful of large metros. When the office recovery first started to take hold, builders stuck to build-to-suit projects. But now they’re placing higher bets on the increase in demand and getting a start on projects before the tenants are found.

Speculative ventures are growing in metros like Houston, San Francisco, San Jose, Boston, Austin, and New York, the CoStar Group reports.

“Spec deals are trending upward across the country as rising rents and receding supply justify new projects,” CoStar Group reports.

Office rent growth year-over-year held steady at 3.7 percent in the second quarter, which was the largest increase in the recovery to date, according to data from the CoStar Portfolio Strategy. What’s more, project deliveries rose by nearly 20 percent to 47 million square feet over the last four quarter compared to a year prior. Under-construction volumes have surged more than 38 percent over year-end 2013 levels, CoStar reports.

"This is by no means a spec-driven supply wave to be concerned about" from an overbuilding standpoint, says Aaron Jodka, manager of U.S. market research for CoStar Portfolio Strategy. "Spec is no longer a four-letter word in the office markets where rents justify construction. The issue is, there are only a handful of markets where that’s the case.”

Source: “Spec Development Returning in Hottest U.S. Office Markets,” CoStar Group (July 25, 2014)