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Top Office Developers Hit the Pause Button on New Projects

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US real estate developers are delaying large office projects already underway or in the planning stages. remote work.

Some property developers see periods of economic uncertainty and weak office demand as favorable times to start new projects. Large developments tend to take three to five years or more, he said, so the developer is confident it will attract tenants looking for a trade-up in office quality. Modern office with many facilities, Just as the economy is gaining momentum.

However, rising interest rates and Employees are slow to return to the office Even some risk-taking developers are wary of the future. With office usage only about half of what it was before the pandemic, some of the most active developers have postponed major projects and lost motivation for new development.

“There is increasing uncertainty in the world and tenants are acting accordingly.”


— Michael Franco, Volnado President

That list includes real estate tycoons

Volnado

Realty Trust, Houston-based Hines,

kilroy real estate Ltd.

based in toronto

Brookfield Asset Management Ltd,

According to companies and people familiar with the matter.

“Caution is the word of the day,” Vornado president and chief financial officer Michael Franco said on Vornado’s earnings call last week. I have.”

Some analysts criticized these and other comments by Chief Executive Stephen Ross on the grounds that Vornado’s planned move to a new office tower on the grounds of Manhattan’s Pennsylvania Hotel, which is being demolished, was sooner than expected. I take it as an indication that it may be delayed. Ross declined to mention the issue on the phone.

Kilroy, which postponed a 600,000-square-foot development in San Diego earlier this year, said last month it was shelving a 500,000-square-foot project that had already begun in Austin, Texas.

“There’s a time to buy, a time to sell, a time to grow and a time to be patient like we are now,” John Kilroy, CEO and chairman of Kilroy Realty, said on the earnings call.

About 156 million square feet of office space is currently under construction in the 54 largest U.S. markets, up from 186 million in the first quarter of 2020 before the pandemic hit, according to data firm CoStar Group Inc. Decreasing. This number is expected to decline further. Developers are facing rising vacancies and falling rents in most markets.

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The nationwide office vacancy rate is at 12.5%, up from 9.6% in 2019 and the highest since 2011, CoStar said. CoStar says 37% of the space under development is available, more than double his in 2019 and approaching the 2008 record of 39%.

CoStar Senior Analyst Nancy Muscatello said:

Many companies are telling employees to return to the office after two years or more of remote work. But companies are also adopting new workplace strategies that allow employees to work from home several days a week.

As a result, tenants require less office space. Brokers say most companies don’t include expansion space when signing new leases, as was common practice in the past.CoStar says about 212 million square feet of sublet space is now available, a record since 2005 when the company began tracking the metric.

Office landlords had hoped rental activity would begin to return to pre-pandemic levels, but there are few signs of that, especially now that the threat of an economic recession looms. New tenant searches in October were less than half the average pre-pandemic pace of 2018 and 2019, according to the VTS Office Demand Index.

Not all developers are hitting the brakes.

boston properties Ltd,

Office Real Estate Investment Trust is building a 390,000 square foot project in San Jose, California. Planned new Google campusA spokesman said that by the second half of 2024, “market conditions can be expected to improve.”

Demand for top-quality spaces with great locations and amenities, including restaurants, stunning views, fitness centers and daycares, remains strong, the developers behind the development say. Companies adopting new workplace strategies find this space worth paying higher rents. One reason is that we are renting less and encouraging employees to return to the office for more days.

“They want to find the best spaces with amenities, restaurants and places that bring people back,” said Steve Center senior vice president.

american asset trust Ltd,

We are developing a 200,000 square foot office building in San Diego without a pre-lease.

This strategy has worked for some developers during past recessions. The Durst Organization of New York famously built his 52-story tower in Times Square during the recession of the early 1990s, but did not pre-lease and sign it with Condé Nast Publications before its completion.

However, high interest rates and rising construction costs in the current market pose new challenges to this strategy.Even if developers can attract tenants to new buildings, they may not get Rent required to pay off the investmentsays some analysts.

“As history shows, there will be plenty of demand for new, high-quality office space,” said Danny Ismail, senior analyst at real estate analytics firm Green Street. “But will there be demand at the rents needed to justify these developments?”

Write a letter to Peter Grant at [email protected]

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