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60% Of New Office Product Set To Come Online In The Next 2 Years Is Pre-Leased

At a time when employers are struggling to find talent in the tight labor market, more than 60% of new office product slated to come online in 2018 and 2019 has been pre-leased.

CBRE reports more than half of that new construction is concentrated within the top 10 markets in the country, and 80% of the supply under construction in Boston, Philadelphia and San Francisco has already been pre-leased. 

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Office construction, though still robust, has remained slow coming out of the recession. CBRE estimates supply levels will drop significantly to 47M SF from the year prior when construction peaked at 61M SF, according to CBRE. That slowdown has boded well for the sector considering office-using job growth is expected to slow net absorption this year to 32.1M SF from 50.1M SF in 2017. 

“As the real estate cycle progresses through moments of increased construction, there is always concern that markets will get overbuilt or will not actually answer the demands of tenants. These findings put those concerns at rest and show the overall health of the office-using market,” CBRE Americas President of Advisory and Transaction Services Scott Marshall said.

Tech Talent Acquisition Drives Demand 


Talent acquisition has become a primary focus for companies as labor shortages plague the nation, leaving many to turn to highly desirable office spaces and amenities to attract and retain the best employees. 

The trend has been particularly notable in markets like Boston, Philadelphia and San Francisco. Of the five new Class-A assets constructed over the past 24 months in San Francisco — Salesforce Tower, The Exchange, 350 Bush, 181 Fremont and Park Tower — four of the projects are already 98% leased, Marshall said.

Boston saw similar success in 2017 with tech-focused companies both relocating and expanding in the market. Rapid7, a company that creates software for security professionals, became the anchor tenant of Hub on Causeway. That same year WeWork opened a 60K SF branch in Boston skyscraper One Beacon Street.

Though Philadelphia did not experience the same level of office leasing activity last year as Boston, several high-profile deals inked in Q4 — including Spark Therapeutics' 107K SF lease at One Drexel Plaza — allowed the city to end the year on a high note, JLL reports. 


While tech companies are a big driver of office leasing activity, that industry is nowhere near the only driver today.

"There are certainly markets where demand for tech talent is the primary driver, but in cities where other industries may be more prevalent — like finance and media in New York or legal and nonprofit with D.C. — that new construction is being used to attract millennial talent, not just tech talent," Cushman & Wakefield Principal Economist and Head of Applied Research Ken McCarthy said.

While the data shows more traditional industries like financial services are contributing to pre-leasing demand alongside tech, Marshall said it is important to note that in many of these cases, the user is often leasing space for a tech arm of the company.

“It might be a financial services user taking up space, but that user might be locating a data center or info security division. A non-tech company opening a tech-focused office likely would seek out a location that allows them the ability to access tech talent but also with proximity to their primary industry cluster,” Marshall said.

Corporate Tax Breaks Could Spur More Spending


Despite the large number of office buildings under construction in 2017, the U.S. vacancy rate rose by only 10 basis points to 13% for the year, signaling growth has been a result of company expansions rather than relocations.

“Anytime we go through moments of new construction, there are questions about organic growth — tenants actually expanding — versus moving from an older asset built in the last cycle to a newer building. I would say that the overall vacancy rates for these markets remaining stable show that the absorption of these new assets is mostly organic,” Marshall said.

While McCarthy was hesitant to attribute the high levels of pre-leasing and healthy absorption to corporate tax cuts, he did not rule out the possibility that they could contribute to corporate investment efforts in the coming months.

"It takes a long time to develop an office building, and pre-leasing for current construction has been underway for a while now. So, I would not say that optimism from corporate tax cuts has had an impact on pre-leasing [but] will there be some add-on because of the tax cuts? That may well happen.

"Companies that want to invest in talent, their corporate real estate and facilities may look to invest that additional cash flow from tax cuts into upgrading their office space," McCarthy said.