Top developers are punting on new office projects as workplaces face uncertain futures.
High vacancy rates and dwindling leasing demand have pushed developers to delay significant office projects either in the planning stages or already underway, the Wall Street Journal reported. People familiar with the matter told the outlet firms including Vornado Realty Trust, Brookfield Asset Management, Hines and Kilroy Realty are backing off of the sector.
Low demand and economic uncertainty occasionally leads developers to go full-throttle on office development, anticipating the ebbs and flows of the market; major projects could take years to complete. But interest rates are high and the future of office work has never been less clear.
In the country’s 54 largest markets, there is 156 million square feet of office space construction underway, according to CoStar, down from 186 million square feet in the first quarter of 2020. Meanwhile, the national office vacancy rate is 12.5 percent, the highest since 2011.
“There’s increasing uncertainty in the world, and tenants are acting accordingly,” Vornado Realty Trust president Michael Franco said last week in the real estate investment trust’s third-quarter earnings call.
CEO Steven Roth in the call cast doubt on the Hotel Pennsylvania site, where demolition is on track to be completed by the end of next year.
“I must say, the headwinds and the current environment are not at all conducive to ground-up development,” Roth said, demurring when asked if Vornado is considering non-office uses for Penn 15.
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Office space up for sublease back on the rise
Nearly a record amount of space under construction is not pre-leased, another worrying sign for developers. Approximately 37 percent of space under development is available, according to CoStar, more than doubling the rate from 2019 and approaching the 39 percent record set in 2008.
Flailing demand for office space is exemplified by subletting trends as companies declare they no longer need the amount of space they did prior to the pandemic. CoStar data show 212 million square feet are available to sublease in the country, the highest amount since the firm started tracking the metric in 2005.
— Holden Walter-Warner