What Influence will New Construction Have on the Southeast Suburban Market?

By Jamie Gard
Frederick Ross Company

It's not clear that there is enough new construction in the pipeline to significantly impact this market.  While there have been a number of announced new projects in the southeast suburbs, only a few have broken ground. Many new developments are awaiting pre-leasing in order to greenlight construction.  We are seeing a hesitancy by tenants to pay what the new projects cost to build and are asking, and a shortcoming of demand to meet the new supply options.  The factors include:

  • Demand:
    • Overall vacancy is 16.59 percent, with Class A at 13.18 percent, and Class B at 22.63 percent.
    • Median rental rates are $23.00 per sf for Class A space and a $18.00 per sf for Class B (all rates gross)
  • Supply:
    • Sublease space is still not a major force, although blocks are coming available due to credit crisis/housing industry job reductions.
    • Current large blocks (40k +) available:
      • 9 Class A, with average asking rental rate of $21.87 per sf.
      • 8 Class B, with average asking rental rate of $19.28 per sf.  

Although vacancy has compressed significantly in the southeast suburbs over the past two years, there are still plenty of options for the middle-market tenant.

Lincoln Station & Palazzo Verdi are under construction, offering AA space with rates over $30.00 per sf.  There are tenants, such as Ciber (who leased 77,000 sf at Palazzo Verdi), desiring super-premium LEED-certified space.  However, the market is not as deep as in the CBD, which is home to numerous tenants, especially law and oil & gas firms, who have historically been drawn to premium space (with cost as no object). These southeast projects will lease up, but do not offer significant competition to current inventory, as their product type is quite superior to existing buildings.

However, Parkside Office Plaza at Inverness broke ground in the third quarter, and offers a "value-A" alternative with asking rates of $24.75-$25.75 per sf.  Other similar proposed projects about to be announced are expected to command rates in the mid-20s. How many, realistically, will break ground is still a question.  This type of new product will compete head-to-head with existing inventory and will probably draw "flight to quality" tenants seeking new infrastructure at the lowest price.  This trend has been evident in the retail sector, with new projects enjoying robust leasing at the expense of older centers.

This will lead to functionally obsolete buildings being renovated, condoed, or razed and redeveloped as new office or mixed-use projects, e.g., the Stone & Webster Building and Plaza Marin being redeveloped as the retail and residential phases of The Landmark, respectively. 

Ultimately, new supply will have minimal effect in the current market because:

  • Without pre-leasing, most proposed projects will not get built, and supply and demand will stay relatively in balance.
  • Creative reuse of older buildings will also serve to keep the market in balance.