October 13, 2015

"Gone are the days of companies expecting employees to come to them. Today's firms realize the need to offer a dynamic live/work/play environment to attract top talent, and office projects are sprouting up in both established and emerging clusters across the U.S. in response to this trend." 

- Andrea Cross, Americas Head of Research

Talent and tenant demand driving construction clusters in major markets
In the final release in our three-part series on office construction trends, we examine clusters of construction activity in leading markets across the U.S., including Boston, Dallas/Ft. Worth, Denver, Houston, Manhattan, Phoenix, San Francisco, San Jose, Seattle and Washington, D.C.   

Key Trends:
  • War for talent driving development activity in urban cores with dynamic live/work/play environments
  • Construction "boomlets" occurring in established and emerging submarkets favored by leading industries, especially technology
  • Lower-cost Sunbelt markets attracting corporate headquarters relocations and expansions, driving development

Construction activity is not only concentrated in the 10 leading markets, but also in clusters of established and emerging submarkets in each of these metro areas. Highlighted in Figure 1 below, these clusters encompass 40.2 million square feet, or 57% of construction under way in the top 10 markets. Development activity generally reflects where leading industries, especially technology and other creative sectors, are expanding, as well as the need for employers in a broad range of industries to offer a desirable live/work/play environment to attract top talent. 

In addition, leading technology submarkets command an aggregate rent premium of 11% over overall office market rents of 30 U.S. and Canadian office markets examined in CBRE’s Tech-Thirty 2015 report, justifying development activity in many of these submarkets even amid rising construction costs. 

In several cities, entire neighborhoods are being repurposed in response to these trends to include new office space as well as retail and residential offerings. Examples include Midtown Manhattan's Far West Side, which accounts for 68% of office construction under way in Manhattan, and Boston's Seaport, where 37% of the metro area's office construction is occurring. Downtown Denver also is experiencing a surge in development activity across multiple property types, including nearly 60% of the metro area's office space under construction. The urbanization trend, coupled with tech sector growth is driving development activity in locations such as Downtown Seattle, home to 80% of the metro area's construction activity, and the South of Market and South Financial District areas of San Francisco, which combined account for 64% of total construction under way in San Francisco and the San Francisco Peninsula. With limited availability of land in the northern part of Silicon Valley, development activity has picked up in Sunnyvale, Santa Clara and San Jose (54% of construction under way in the metro area) to meet robust tech tenant demand.

Prior to the drop in oil prices beginning in mid-2014, strong energy industry growth spurred a large amount of construction in the West Houston area, home to nearly 40% of Houston's office development activity and where almost all pre-leasing has been to energy firms. The Far North Dallas and Richardson/Plano areas of Dallas/Ft. Worth (53% of metro construction) and Tempe and Mesa areas of Phoenix (68% of metro construction) have proven attractive, low-cost locations for corporate headquarters, expansions and relocations. Washington, D.C. developers are responding to strong demand from tenants, especially law firms, for high-quality, efficient space; nearly half of square footage under way in The District is within trophy office buildings in the East End submarket, where the occupancy rate and asking rents are significantly higher than the overall Washington, D.C. office market.

Click on the links below to view the previous two stories on the new construction delivery schedule and pre-leasing activity by industry.


Additional U.S. Research from CBRE can be found here.