Office Outlook: The Next Five Years

Specialties in Brief: Commercial Market Trends

August 1, 1999

The success of the office market over the next several years will be determined by six major trends, a combination unlike any we’ve seen in the recent past.

  1. Demand for cost-effective, quality-oriented functionality--Globalization and the drive for profitability are impacting companies throughout the country, and this trend will continue. There’ll be no more trophy buildings. Corporate icons like the Sears Tower in Chicago and the Woolworth Building in New York City are monuments to the way business used to be. Buildings today must be operationally and technologically efficient and able to perform equally well for both the owner and the tenant. Corporations are far more sensitive to functionality than ever before.
  2. Securitization or change of ownership—Changes in corporate ownership and the resulting new missions and visions are perhaps the dominant influence impacting the office marketplace. This new era of development will be much different from the 1980s, when buildings obtained financing and then went looking for tenants. Today a building won’t be built on “spec.” In fact, today you can’t finance a building of more than 1 million square feet without 30 percent to 40 percent being preleased.
  3. Development of smaller buildings around the downtown perimeter--The exception to this trend of no spec building will be the construction of buildings in the 200,000- to 300,000-square-foot range on the perimeters of the nation’s central business districts. This trend--fueled by the convenient location,lower construction costs, and often lower property taxes of this type of building--will keep some tenants in the city that would otherwise head to the suburbs.
  4. Use of government subsidies--Government subsidies and allowances are becoming more important to developers and owner-managers. Enterprise zones, tax increment financing districts, and tax abatement programs are causing significant competition among city and suburban communities.
  5. The appearance of “shadow space” due to mergers--Developers will be cautious in the next few years, knowing there’s enough hidden space out there to meet market demands. This “shadow space” is made up of large blocks that corporations have available but that don’t show up in industry reports because corporations are still paying rent on the space. Amoco, for instance, is reported to be vacating 900,000 square feet of space in Chicago that isn’t on the charts. So considering the space we know is out there and the space we anticipate to become available, the first few new buildings will fill up. But thereafter new properties and Class B and C buildings will lose tenants.
  6. Potential for suburban "glut"--There’s a potential for glut in the suburban markets late this year as a result of new construction. In Chicago’s East-West corridors, for example, there are seven new buildings with no preleasing. Even new growth in the area will not be enough to fill all the space.

In sum, this fluid and competitive marketplace will continue, but don’t expect it to emulate the early 1980s, when excess space drove market rates below the cost of initial construction.

Wolfe, executive managing director of Insignia/ESG in Chicago, will speak at TRANSACT ’99 in a session titled “Staying Two Steps Ahead of the Office Market: Positioning for the Next Five Years.”

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