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We’re still putting up a whole lot of new office buildings

Here's an interesting thing. When the pandemic hit and people started working from home, construction of office buildings fell. That makes sense. But it only fell a little bit:

Despite sky-high vacancy rates, we're still putting up office buildings at the rate we did at the very peak of the housing bubble in 2007.

Something is odd here. It reminds me of the fact that urban commuting has held dead steady despite the fact that supposedly way fewer people are coming in to the office. I wonder what's really going on?

17 thoughts on “We’re still putting up a whole lot of new office buildings

  1. somebody123

    Two things:
    - new office space is generally much much nicer than the old stuff, and developers are banking on stealing tenants. Here we’re still seeing a steady flow of companies out of downtown spaces built in the 80s and 90s and into smaller, brand new spaces in the burbs.

    - induced demand: traffic acts like a gas, not a liquid, it expands to fill available space, so other kinds of traffic are replacing commuter flow. maybe you used to avoid the interstate during the morning commute, but now you know it’s light so you take that 8 am yoga class. lots of people making those decisions = overall traffic doesn’t decline.

    1. cmayo

      Traffic as a gas is absolutely the correct way to look at it. Congestion even behaves like gas under pressure. It's kind of wild to think about sometimes.

      And yeah, induced demand is absolutely why traffic hasn't really decreased.

      1. Aleks311

        But you can still tell the difference (most places) between rush hour traffic and off-time traffic. And here in Florida, between Snow Bird/Spring Break traffic and the rest of the year.

        During the height of the Pandemic traffic did decrease, extremely so most places. It made normally congested areas feel like the Zombie Apocalypse had happened, and even the Zombies were practicing social distancing.

        1. somebody123

          it doesn’t literally act like a gas, it’s a metaphor. there are mathematical models for induced demand that take those things into account. but in the most common circumstances under normal conditions, it’s like a gas. you can also think of it as a goldfish (grows to the size of its tank, but only given enough food) or a flock of pigeons (the more you feed them, the more there are.)

    2. cephalopod

      The flow to the burbs will just make it that much harder for workers as vehicle costs continue to rise. We have been so conditioned to think of gas prices as the major vehicle expense, we're not prepared for the new normal of repairs and insurance being the biggest cost burden of vehicle ownership.

  2. painedumonde

    Developers had a huge change of heart and decided to build then go for zoning changes for public housing?

    I'll be here all week folks! Be sure to tip your servers.

  3. joey5slice

    I wonder how much of this is replacing old office space vs adding net new square footage.

    I remember a Marketplace story from earlier this year saying that "Class A" office space was still doing pretty well, but "Class C" office space was really hitting tough times. If I owned a Class C building, I wonder if I would bet on upgrading my property rather than trying to convert it to some other use.

    I'd be curious if we could see net new square footage.

  4. golack

    Cities are trying to covert excess office space into housing. It's expensive--redoing the plumbing for bathrooms and kitchens, and probably not bring in the money that a commercial client would, if such clients would rent out a good portion of the building. Even re-wiring a building for electricity and internet/wifi to meet the needs of commercial clients can be an expensive undertaking--not to mention cooling loads as more places need data centers.

    1. DButch

      I ran into that in 2001 after moving from MA to WA on behalf of EMC (big maker of highly redundant disk storage arrays, now part of Dell).

      We took over a floor in a new office park near the Microsoft main Redmond campus. We told them what our electrical requirements were and the said: "We aren't zoned for industrial operation!"

      Our lab would have taken the total electricity for the entire planned 20 office buildings that were going to be built in the park. The park management did some fast research and realized that they needed to do a massive upgrade to their power plans. Within 3 years there were multiple computer labs in every building...

  5. cmayo

    There's a pretty long timeline on commercial projects.

    Also, it's not like our zoning and use laws changed much/at all in many areas where this would be happening (so, large cities). If all you can build on these parcels is office space, then office space will be built. Especially in our current capital ecosystem where there's just capital sloshing around everywhere with nothing much to do, seeking ever riskier investments and willing to accept lower returns.

    And then of course there's just behavioral inertia.

  6. Murc

    Two things.

    One, I'd like to know where this office space is being built; it is in downtown cores, or is it a million exurban satellite offices built on cheap land?

    Second, we've seen this sort of thing before, in Japan and in China. Demand slackens, vacancy rates go way up, but you just keep build build building anyway. There's usually some kind of house of economic cards behind it, where certain interlocking economic sectors try and keep feeding on real estate as long as possible.

  7. D_Ohrk_E1

    Many (most?) Class C buildings have been fully depreciated. Their rents are 1/2-1/3 that of Class A. Aren't you incentivized to raze the old and build anew?

  8. stilesroasters

    I definitely wonder if this is a large city/small city divide along with a dash of concentration among “knowledge” workers

  9. ronp

    you need to look more closely to the data in terms of location. at least in Seattle there is nothing happening in terms of office construction other than Microsoft finishing their campus.

  10. jdubs

    Something is odd here...

    Typically we see this data in square feet (msf) instead of inflation adjusted dollars.

    In terms of space, all the data does appear to show a big drop-off over the last few years.

    Perhaps Kevin's data is wrong, or perhaps the cost per sq foot has increased dramatically so that many fewer buildings are going up, but total spending hasnt declined.

  11. Jasper_in_Boston

    Any chance some of this could be data centers? These are places where knowledge workers go to work, after all, so perhaps they're classified as "office space"?

    I keep hearing about the massive, continuing expansion of data centers...

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