Empty Office Buildings Don’t Scare These Developers

With office vacancies repeatedly reaching record highs in cities across the country, spending millions to build new office space may seem nonsensical — and a bad investment. 

But regardless of what may be logical for real estate financiers and tenants — and the rest of the world — some developers are forging ahead. Nearly 100 million square feet of office space is in the construction pipeline as of November as real estate developers continue to plan and break ground on new projects.

“The spigot has not been shut off,” said Michael Lirtzman, the head of office agency leasing at real estate brokerage Colliers’ U.S. division. 

Though some builders have shifted focus to residential, while others have taken a hiatus on building anything at all, those committed to more office space are convinced by the notion of a flight to quality.

That theory is that employees will go into the office, but only if they are in shiny new buildings that provide amenities to incentivize a return. It’s a risky move. If developers succeed, they steal tenants from less luxurious buildings and can charge high rents. If they fail, they blow millions on more empty office space.

Last month in Chicago, shovels got dirty on the site of a 409,000-square-foot ground-up, 11-story office project. Expected to be completed in 2025, 919 W Fulton Street will have features like floor-to-ceiling windows, outdoor terraces, a rooftop lounge and bar, fitness center and a football field-sized basement for parking. The project is costing its developers $300 million.

In a statement, Alex Najem, founder and CEO of developer Fulton Street Companies, said the project will "remind the world that we can – and will – continue to build in downtown Chicago.” 

But developers in other regions of the country are also stepping up to bat. As employees have moved to smaller, cheaper cities, their employers have followed — and so have developers. That migration has resulted in new hubs for workforces.

In the last quarter, the top markets where companies were moving in were the Dallas-Fort Worth metro area in Texas, followed by Detroit, Raleigh-Durham in North Carolina and South Florida — a shift from historic norms, according to a report by Colliers.

Rents for premium office space — defined by new construction with various bells and whistles — also went up, despite vacancies. A tracker by commercial brokerage JLL found that last year those rents were up 5% and can be over $100 per square foot. That trend has continued this year, though JLL has not yet released figures. 

“Those markets that have reached a critical mass, either from a talent perspective, an institutional capital perspective or a specialized industry perspective,” said Jacob Rowden, the research manager of U.S. office for JLL. “There really is that spillover effect when some of these major decisions are made that sees some of the competitors follow suit.”

Developers also have more opportunities in those cities. While traditional hubs, like San Francisco, have a saturation of high-quality office buildings, cities like those in Texas — where tech companies are moving — still lack that kind of space. 

Atlanta-based developer Cousins Properties also keeps adding to its mixed-use hub in North Austin, Texas. Last year, it was reported that it would build another office tower to its portfolio in the area. The city has approximately 8 million square feet of office space in its pipeline.

So far, the plans have paid off. In August, Amazon committed $60.5 million to build out office space in an 18-story tower.

Nearby, Apple added to the newfound tech hub earlier this year, expanding its campus to the tune of $240 million. 

Nashville saw a record number of construction permits filed over the past two years, in part thanks to commercial projects. In 2021, those permits were valued at $5.5 billion, with $4 billion attributed to commercial projects. In 2022, it was bumped up to nearly $6 billion. 

Among the projects to be delivered is Convexity Properties’ 15-story office tower. Its features include electric vehicle charging stations and fiber optic connectivity. 

“There has not been a real space in the market for trophy level, top-tier office assets, particularly high rise stuff that is on par with what the same tenants were seeing in New York, Boston, Chicago, San Francisco,” ​​Lirtzman said. 

In more traditional office metros, developers are hot and cold when it comes to filing for new construction. In New York City, developers rallied in the first quarter of 2022, filing permits for 2.3 million square feet of new office space, according to data provided to The Messenger by online real estate development platform PropertyScout. 

Though those projects have largely carried on in the building process, that flow slowed a drip. In the second quarter of this year, permits were filed for 300,000 square feet and, in the third quarter, that figure dropped to 50,000 square feet of new construction plans. It’s a big change from the boom of the mid-2010s, when developers were racing to build upwards.

“We have since regressed to the Covid days of 2020,” said PropertyScout CEO Wilson Parry.

Among the projects filed in that time, and moving forward, is a 28-story “World of Rolex” retail and office headquarters developed for and by the watchmaker, according to records filed with the city. 

Other landlords show no signs of letting up on their planned projects. As part of the development of a 51-story tower at 350 Park Avenue, Citadel, Vornado Realty Trust and Rudin Management agreed to buy the air rights attached to St. Patrick’s Cathedral at 631 Fifth Avenue. The deal frees up the development of the property — and costs as much as $164 million, according to real estate intelligence firm PincusCo.

In a third quarter call with investors, Vornado CEO Steve Roth doubled down on his belief in the office.

“We believe that the future of work will principally be in the office,” Roth said. “The key is that talent wants to be here. It remains the number one city for college graduates from practically every region of the country.”