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In February, JE Dunn, a construction company based in Kansas City, Missouri, began building one 677-foot-tall office tower in downtown Omaha, Nebraska.
The $600 million project, which will be the new corporate headquarters for insurance company Mutual of Omaha, includes 800,000 square feet of office, meeting and service space. Once completed, the skyscraper will be the tallest building in Nebraska.
But while some massive office projects continue to move forward, economists say activity has not returned to pre-pandemic levels and won’t anytime soon. Dodge expects total office construction to start falling 6% to $37 billion in 2024, according to a recent Dodge Construction Network webinar.
Economists expect core office activity to erode further
It starts, measured in dollars, from 2015 to 2024.
Office vacancy is at about 18 percent, Branch said. That’s about 140 basis points higher than a year ago and trending higher, he added.
“[That’s] we will continue to put extreme pressure on the spec side of the market,” Branch said. “We believe the market continues to decline in 2024.”
The speculative office construction market represents a significant portion of office activity — 65 percent by dollar value, Branch said. Speculative office construction involves building office space before securing a lease.
However, while economists expect speculative office construction to slow, other forms of office construction will continue to drive overall activity in the sector, according to Dodge data.
For example, alteration-type projects are on the rise. These projects include any modification to an existing building that affects usability, such as remodeling, renovations, or rearrangements in structural parts.
Recent office alteration projects include Boston-based Shawmut Design and Construction transformative repositioning project in a 100-year-old building at 712 Fifth Ave in New York City and the Gilbane Building Co. of Providence, Rhode Island. $500 million modernization project for insurance giant Northwestern Mutual in Milwaukee.
Alterations historically accounted for 30% to 35% of the office’s total activity, according to Dodge. However, over the past two years, these types of projects have come to about half of the office’s total activity, Branch said.
This means that new office construction is even worse than general industry data suggests.
“If you were to take disruptions out of this market and just look at new activity, it’s pretty weak in 2024,” Branch said during the webinar. “If you were to look at our square footage data, the level of office construction starting in 2024 is a 10-year low.”
However, Branch expects a resurgence of corporate campuses or owner-built projects. While these owner-built office campuses only account for 10% of total office activity, Branch said he is “seeing a slight uptick in activity” among these types of projects.
“I don’t think the data is there yet to tell us exactly why,” Branch said. “But I expect these corporate campuses to pick up some steam again in 2024.”
For example, in addition to the Mutual of Omaha skyscraper in Nebraska, real estate data giant CoStar Group also opened its $460 million research and technology center in Richmond, Virginia. The 26-story, 750,000-square-foot office it will be the second tallest building in Richmond, according to a press release from the company.
But again, these corporate projects represent only a fraction of the office’s total activity.
“Over our five-year forecast period, the office market, in our estimation, will never get back to where it was in 2019,” Branch said. “We continue to believe here that distance and hybrid will continue to be a driving force in the employer-employee relationship.”
