Some Markets Ripe for Office Development; Some Not

As the office recovery continues, developers are once again beginning to take a closer look at construction. Of course, analyzing individual market supply and demand trends to justify new development is important.

One type of analysis that can provide additional insight is looking at the relationship between available large blocks of space (greater than 100,000 square feet) and large-tenant occupancy among different markets.

Markets with a limited availability of large office blocks relative to demand could be ripe for development, as signing a large tenant is often the key to securing financing.

Surprisingly, more secondary markets are starting to show up as candidates for this development strategy, including Columbus and Minneapolis, which have a dearth of large blocks of available space.

Tech markets such as Denver, Austin, and San Jose also appear to be strong candidates for development, though these markets are already starting to experience an uptick in construction.

On the other hand, some office markets still have a plentiful supply of large blocks of available space.

Northern New Jersey is the poster child for what happens to a market that is oversupplied with large blocks of space, including four blocks of 1 million square feet or larger. It has been one of the last metros to see an improvement in office vacancies, which remain more than 400 basis points above the historical average.

One of the main reasons for the elevated office supply in Northern New Jersey is that one of the metro’s major drivers, pharmaceuticals, has been shrinking.

Companies such as Johnson & Johnson, Merck & Co., Bristol Myers Squibb, and Pfizer once took up large swaths of space throughout the state for office, R&D and light manufacturing uses, but these firms are now facing a “patent cliff” as blockbuster patents expire.

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