DALLAS – (By Dale King) – An unprecedented global office building boom is underway, with more than 700 million square feet of office space currently under construction and planned for completion by the end of 2019, according to Cushman & Wakefield’s Global Office Forecast.
Dallas is at the center of this surge. The city is projected to rank No. 1 in the Americas for office completions, with an expected 20.5 million square feet. On a global scale, Dallas ranks No. 7 for office completions, behind rapidly expanding markets such as Beijing and Shanghai.
The report raises the question of whether this volume of new development represents overbuilding. The total planned construction over the next three years is equivalent to creating five full cities’ worth of office inventory—comparable to the combined office stock of Washington, D.C., Dallas, London, Singapore and Shanghai.
“Although demand and job growth will remain healthy through 2019, totaling roughly 520 million square feet, it will fall well short of supply, which will push vacancies higher in most cities around the world. From that perspective, the world is overbuilding,” the report states.
Yet the report also offers a counterpoint: many occupiers continue to prefer new, high-quality office space over older Class B and C buildings. In the U.S., newly built, high-quality space has accounted for 65 percent of all office absorption since 2012. That dynamic suggests that new product can attract demand even when overall supply rises.
Regarding employment gains among U.S. metropolitan areas, Dallas is expected to rank No. 2 in total office jobs created between 2017 and 2019. Globally, Dallas is projected to be No. 14, adding approximately 92,700 new office jobs during that period. From 2014 to 2016, Dallas ranked No. 13 worldwide with 98,000 new office jobs.
In Dallas specifically, the local market appears relatively well-positioned despite concerns about overbuilding. The primary weaknesses forecast are slower rent growth and higher vacancy rates.
“The market has seen strong rent growth—nearly 10 percent between 2014 and 2016,” said Curtis Hornaday, Dallas market research director for Cushman & Wakefield. “Over the next three years, that is expected to ease and stabilize, with projected growth of 1.5 percent from 2017 to 2019.”
“Vacancy in Dallas is expected to increase during 2017–2019,” Hornaday added, “largely due to the ongoing wave of office construction.”
He also noted that Dallas/Fort Worth’s projected job growth of 92,700 places the region No. 2 in the country, only a few thousand jobs behind New York City, a market nearly twice Dallas’s size.
Kevin Thorpe, global chief economist at Cushman & Wakefield, said developers are responding decisively to rising demand. “They are certainly placing some big bets on new product, but most of it is concentrated in major global cities, precisely where appetite for high-quality buildings is strongest.”
“I’m less concerned about leasing of the new space, because in a sense supply is rushing to meet demand and giving tenants what they want. My greater concern is how this wave of supply will affect lower-grade product, which I expect will struggle to compete,” Thorpe said.
Randy Cooper, vice chairman of Cushman & Wakefield in Dallas, pointed to the city’s deep bench of experienced, well-capitalized local developers. “We are fortunate in Dallas to have a strong group of entrepreneurial, well-funded developers like Hall Group, Billingsley Co., KDC, Trammell Crow Co., Van Trust, Ross Perot Jr., Granite Properties and Jerry Jones,” he said.
“They hold land inventories around the city and can often rely on internal financing. In other markets, developers must acquire land and secure external financing, which can take months. I’ve seen developers in Dallas arrange financing in less than an hour. That speed is a major factor in the relocation and growth activity we continue to see.”
The study projects that the Asia Pacific region—especially Greater China—will drive the global development boom. Nearly 60 percent of the world’s new construction is expected to be concentrated in Asia Pacific. Within the region, construction is focused in a handful of markets: Beijing, Shenzhen, Shanghai, Manila and Bangalore. Those five cities account for 55 percent of Asia Pacific’s construction and more than a third of global construction.
Europe’s development pipeline is also increasing, though not to the same extent. Cities such as Paris, Vienna, London and Brussels are poised to reach cyclical highs in new construction over the next two years, while Madrid is expected to see steady growth even as rental-rate expansion slows across other markets.
The Americas are experiencing a strong construction cycle as well, peaking in 2017 and moderating through 2018 and 2019. Still, the U.S., Canada and Latin America are likely to add more space than they will absorb in the coming years.
Other key findings from the report include:
- The top five U.S. markets for office job growth over the next three years are projected to be New York, Dallas, Los Angeles, Atlanta and Chicago. The Washington, D.C., metro area and Phoenix are also expected to see notable gains.
- In the U.S., secondary markets are expected to lead in rent growth over the next three years, with notable increases projected in Seattle (+6.8%), Raleigh-Durham (+4.8%), Oakland (+4.2%) and Portland, Oregon (+4.2%).
- Brexit-related uncertainty is likely to dampen office-based job growth in the U.K., but London’s vacancy rate is still forecast to remain tight, below 5%.
- Beijing is expected to lead the world in both supply and demand growth over the next three years.
- Sydney is projected to have the world’s lowest vacancy rate by 2019, at approximately 2.4%.