Office construction could start slowing in 2019, report says

Dive Brief:

A new report from Cushman & Wakefield indicates that the pace of office construction could start slowing down in 2019, reported National Real Estate Investor, with increasing construction costs, uncertainty about the current real estate cycle and zoning issues driving the shift.
Right now, the market is strong. The first two quarters of 2018 saw the delivery of more than 28 million square feet of new offices, and the year should finish out with a total of 68 million square feet of new space, an increase from 2017. In the second quarter of 2018, around 60% of new office space was leased by time of completion, and half the space currently under construction is already under contract, although the percentage is higher in hot markets like the San Francisco Bay Area and Seattle.
Next year, total delivered office space should dip to about 55 million square feet, but markets in Florida, such as Miami-Dade and Palm Beach County, have already seen vacancy rates rise. In some markets like Nashville, Tennessee, predicted absorption rates could indicate overbuilding. Even in Brooklyn, New York, for example, it would take 10 years for the market to absorb the 2.5 million square feet of office space now under construction.

Dive Insight:

Construction cycles for different types of projects rise and fall, so it's no surprise that the robust office market might be at its peak. There are other segments of the industry, however, that could take its place, like data center construction. A recent Research and Markets report found that the global data center construction market, which was valued at $43.7 billion in 2017, should reach almost $93 billion by 2025. Most of that activity is projected to take place in North America, giving U.S. construction companies more opportunities for growth.

However, while concentrating on a specific industry niche can be lucrative, many contractors hedge their bets through diversification so that a downturn in one market won't have as much of a negative impact. Take a look at the portfolios of some of the biggest contractors in the U.S. — e.g. McCarthy Building Companies, Turner Construction — and the scope of their services is wide and varied. Even regional contractors like New South Construction in Atlanta serve a diverse cross-section of markets.

So, if as predicted, office construction drops next year, contractors who can fall back on other markets shouldn't feel too much of a sting.