Kilroy was here, but he's left the building — to others
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Top office developers hit the pause button on new projects
U.S. real-estate developers are delaying major office projects already under way or in the planning stages, discouraged by high vacancy rates and the reduction in workspace demand resulting from remote work.
Some property developers view periods of economic uncertainty and weak office demand as good times to launch new projects. Because large-scale developments tend to take three to five years or longer, developers bet that tenants looking to trade up in office quality will be drawn to modern offices with lots of amenities, just as the economy is gaining steam.
But soaring interest rates and the slow pace at which workers are returning to offices have even some risk-taking developers wary about the future. With office use only about half of what it was before the pandemic, some of the most active developers are postponing major projects and are losing their appetite for new developments.
‘There’s increasing uncertainty in the world, and tenants are acting accordingly.’
— Vornado President Michael Franco
That list includes real estate heavyweights Vornado Realty Trust, Houston-based Hines, Kilroy Realty Corp. and Toronto-based Brookfield Asset Management Inc., according to the companies or people familiar with the matter.
The national office vacancy rate stands at 12.5%, up from 9.6% in 2019 and the highest since 2011, CoStar said. Just as worrisome for developers: 37% of the space under development remains available, more than double the rate in 2019 and approaching the record 39% in 2008, CoStar said.
“We’re not quite at 2008 levels, but we certainly could get there in the next year,” said Nancy Muscatello, a CoStar senior analyst.
Many companies have told workers to return to their offices after more than two years of remote work. But businesses also are adopting new workplace strategies that allow employees to work from home a few days during the week.
As a result, tenants need less office space. Most businesses aren’t including expansion space when they sign new leases as they often did in the past, according to brokers. About 212 million square feet of sublease space is currently available, according to CoStar, a record high since 2005 when the company began tracking the metric.
Office landlords had hoped that leasing activity would start to return to prepandemic levels, but there is little sign of that happening, especially now with the threat of a recession looming. New tenant searches in October remained below half of their average prepandemic pace in 2018 and 2019, according to the VTS Office Demand Index.