New Era of Office Towers Will Continue to Rise in 2014

New Era of Office Towers Will Continue to Rise in 2014 – CoStar Group.

While New Office Supply Not Even Close to Mid-2000 Levels, Several Skyscraper Projects Will Change Urban Skylines In Coming Year

By Randyl Drummer |COSTAR GROUP

New data on construction starts and spending provided compelling evidence of a recovery in urban office development, prompting some planners to describe 2013 as “the year of the return of the downtown high-rise” as major skyline-altering projects broke ground in Seattle, New York, San Francisco, Houston, Dallas, Chicago and even in markets hit hard in the housing downturn such as Phoenix and South Florida.

The total value of office construction put in place was up 2.6% in November from the previous month and is 5.6% higher than the same time last year — with private projects logging larger increases of 4.6% and 11.5%, respectively, according to U.S. Census Bureau data released today.

Office construction starts climbed 26% in November, maintaining a growing momentum seen during the second half of 2013, according to a report last week from McGraw Hill. However, much of the increase is contained in several massive new office projects that started in November, including the $336 million Transbay Tower in San Francisco, the $265 million State Farm office complex in Tempe, AZ, and $160 million for the office portion of the $700 million Korean Air Hotel project in Los Angeles.

Though still nowhere near the pre-recession construction levels of the mid-2000s, overall nonresidential development — driven by private-sector spending — is seeing somewhat of a comeback, posting the strongest numbers in at least four years. The office, industrial, hotel and even retail sectors are seeing across-the-board increases, according to outlooks and forecasts from major construction data providers compiled by CoStar News.

With much of the unused shadow supply having been absorbed and construction still at bay in most markets, the U.S. office market is positioned for a strong 2014, which is expected to be the fourth and strongest year of consecutive occupancy gains of the recovery, according to CoStar’s Property and Portfolio Research group.

While overall office construction spending remained muted for much of 2013 as in previous years, the New Year will see an uptick, with Gilbane Construction predicting that total spending for office construction will rise 7% to $39 billion in 2014, the largest increase since 2007. Reed Construction forecasts an even larger increase of 8.6% in 2014, followed by almost 6% in 2015.

Leading indicators for stronger 2014 commercial construction activity remain positive. The Dodge Momentum Index, a monthly measure of initial reports for nonresidential building projects in planning, rose 2.8% in November from the previous month, according to McGraw Hill. Though still well below the peak readings back in 2007, the November increase in the momentum index, which leads hard construction spending by a full year, posted its highest reading since March 2009.

“Nonresidential building is gaining momentum, aided by improving activity for commercial building from low levels while the institutional building sector stabilizes after a lengthy decline,” said Robert A. Murray, chief economist for McGraw Hill Construction. “The construction start statistics, when viewed in the context of 2013 as a whole, are still trending upward.”

The upward trend for total construction starts is expected to continue in 2014, Murray said.

“One plus for construction and the economy going forward is the recent budget pact approved by the U.S. Congress, since it removes the uncertainty that would have come with the threat of another government shutdown in early 2014,” Murray added.

Associated Builders and Contractors Chief Economist Anirban Basu agreed that construction activity bounced back in November in part due to the end of the federal government shutdown.

“The recent acceleration in economic activity sets the stage for a much better 2014, both for the broader economy and the nonresidential construction industry,” Basu said. “We can expect nonresidential construction spending to expand during the first half of the year.”

Large new office project that started in 2013 include the following:

• The first phase of Amazon’s 3.3-million-square-foot campus at Seventh and Westlake avenues in downtown Seattle’s Denny Triangle area, consisting of two buildings valued at $244 million. The project, scheduled to open in late 2015, , adds to the millions of square feet already leased in the city by the Internet’s dominant retailer.

• In October, TIAA-CREF and Transwestern broke ground on BHP Billiton Tower, a 600,000- square- foot office building on the Four Oaks Place in Houston’s Galleria submarket. The 30-story is being built on a 2.72-acre tract at 1500 Post Oak Blvd. is 100% preleased to BHP Billiton, a global energy and resources firm.

• In July, KDC began the $550 million office portion of the State Farm regional headquarters complex in Richardson, TX. The three-building complex includes a 1.5 million-square-foot, 21-story tower, plus parking garages. The State Farm buildings are part of a 186-acre development by KDC that will include more office buildings, apartments, retail and a hotel.

• In July, Samsung broke ground on its 10-story, 1.1 million-square-foot headquarters in San Jose. The $300 million building for 2,000 employees is expected to be finished in 2015.

• In April, Skanska began the first phase of Prudential Financial’s $444 million, three-tower headquarters in Newark NJ, a 20-story high-rise office tower of about 732,000 square feet slated for completion in March 2015.

• Though not a high-rise project, construction began in earnest during 2013 on one of the largest U.S. office projects, Exxon Mobil Corp.’s massive, 385-acre corporate campus along the Hardy Toll Road in north Houston. About 10,000 Exxon employees will begin moving into the 20-building complex in 2014 as the company consolidates operations from Houston, Virginia and other locations.

•  In September, Facebook began work on its $435 million, Frank Gehry-designed West Campus office project on 22 acres in Menlo Park CA. The 433,555-square-foot building with a rooftop garden will hold about 2,800 Facebook employees.