- Spending on office construction hit a record high in August, according to government figures.
- The uptick was surprising, because demand for office space has plunged with work-from-home trends, leading to levels of office vacancy not seen since the Great Recession.
- Higher construction costs, as well as a spate of renovations to lure remote workers back to the office, are among the reasons for increased spending.
- Many office projects were started before the pandemic and are only now in full swing.
Companies need less office space than they used to, thanks to the work-from-home revolution—yet they’re spending record amounts of money on office construction.
Spending on office construction hit a record high $99.4 billion in August, the Census Bureau said this week. Yes, that’s August 2023.
The statistic may be surprising in light of the fact that telecommuting trends have outlived the pandemic and have left desks and offices empty everywhere. Across the U.S., 16.4% of offices were vacant in the second quarter, the highest level since the height of the Great Recession, according to commercial real estate firm Colliers. An even-starker figure: People are only actually going to offices half as much as they did before the pandemic, a rate that hasn’t budged in years, according to Kastle Systems, which tracks keycard-swipe data.
Still, there are good reasons that we’re spending record amounts of money to build office space that fewer people want, according to commercial real estate experts.
A major reason for the uptick in spending: Everything, including materials and labor, costs more these days, said Michael Combs, research director at commercial real estate firm CBRE. The Census Bureau figures aren’t adjusted for inflation, and CBRE’s in-house model of construction costs by CBRE shows that costs are now accelerating three times as fast as they did in 2018.
“The cost of construction has never been higher,” Aaron Jodka, director of national capital markets research at Colliers, said. “As I’m delivering a new building, and I have a new tenant that’s occupying that space, the cost to fit that out, carpet, all the different fixtures, furniture, lighting, HVAC … those are more expensive than they’ve ever been before.”
Some projects were delayed even further during the pandemic because of widespread shortages of building materials, Jodka said.
By many measures other than sheer dollar value, construction is actually down. For example, 45% less square footage was under construction in the second quarter compared with the peak of office construction in late 2019, according to data from Colliers.
The number of new construction projects is around a quarter to one-fifth the level seen in 2019, Combs said.
Many of today’s office products were started before COVID-19 existed, and working from home was a rare perk. Indeed, 40% of office projects currently under construction were started in 2020 and 2021 and were likely planned before the pandemic, according to data from Yardi, a real estate software company.
“Construction projects take a long time,” Combs said. “A lot of these projects were started before the headwinds really showed up, or some of the challenges that face the office market became apparent, and so those projects are going to continue until they complete.”
Many of the current office construction projects aren’t new buildings, but renovations of old ones. Some companies are trying to lure remote workers back to the office by making it more like, well, home.
“Landlords are reinvesting in their properties,” Jodka said. “We’ve generally seen tenants that are seeking higher-amenitized buildings, so having gyms, having outdoor space, having an impactful lobby, food service—different conveniences that make an office building a magnet as opposed to a mandate.”
Interestingly, the fanciest offices in the best locations—dubbed “Class A” in commercial real estate terminology—have experienced the biggest declines in property values compared with their bare-bones counterparts. Class A buildings sold for 35% less in 2023 than the year before, versus a 9% drop for Class B properties, according to Yardi. Still, many companies see upgrading their space as the way to go.
“Our office is being reconfigured and they’re revamping the whole cafeteria,” said Doug Ressler, manager of business intelligence at Yardi. “We’ve even had some folks that were anecdotal that would tell us, ‘They don’t have an espresso bar, I’m not coming back in.’ They’re joking, of course, but it is really more of an amenity enrichment.”