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    August 30, 2022

    These are the Best Markets for Office Building Development

    Over the last two years, U.S. companies have had their teams work remotely during the coronavirus pandemic. But with the Centers for Disease Control and Prevention recently recommending an end to quarantine and social distance mandates, firms have been eager to bring their employees back to the office. However, many staffers based in major cities have resisted moving away from the work-from-home lifestyle because they enjoy greater autonomy and don’t have to commute. 

    Kastle Systems reported that office building occupancy rates in New York City, San Francisco, and Los Angeles are well below 50%. Since those urban areas are major population hubs, the schism between employers and employees significantly affects that sector. Analysts have warned that around $1 trillion of office properties are at risk of complete obsolescence.

    That said, there are still great opportunities for office building development in America, just not in the places you might expect.

    The Best US Markets for Office Building Development

    Although America's top-tier cities likely aren't going to need new office buildings in the future, the situation is different in less densely populated regions. The New York Times reports that a recent study found that small and midsized metros have seen much higher return-to-office rates, particularly those with populations of less than 300,000. In October, half the employees in major cities worked from home, which fell to 38% last spring. But employees working from home in smaller municipalities fell from 42% to 27% in the same period.

    For instance, Austin and Dallas recorded workplace occupancy rates of over 50%, and a Crain's Cleveland Business poll showed that 50% of local commercial real estate brokerages anticipate an increase in demand for office building space this year.

    Greater acceptance of the return-to-office push in smaller cities has impacted how companies in those areas conduct their recruiting. Harvard Business School researchers found that only 10.4% of new job postings in Birmingham, Alabama, allowed remote work. Similarly, only 13% of open positions in Columbus, Ohio, permitted working from home, while 12.6% of job postings in Houston let its staffers work off-site.

    Right now, mid-sized cities in the Southern and Midwestern United States have considerable potential for growth in the office building development sector.

    Regardless of geography, return-to-office drives seem to be more successful in smaller cities for the same reason; improved quality of life. Researchers from Stanford University discovered that employees with short commutes eagerly embraced the transition away from remote work. By comparison, many people found that no longer having a daily commute improved their mental health, making the prospect of enduring long journeys to the office on packed buses and trains very unappealing.

    Civic leaders like New York Mayor Eric Adams are pushing area workers to return to their offices to bolster post-pandemic urban recovery efforts. But it's unclear when or even if companies operating in the big cities will convince their teams to get back to business as usual. Accordingly, launching ground-up office building development projects in large urban areas in the near term isn't a great idea. But that doesn't mean there aren't other opportunities available in those markets.

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    The Future of Office Building Development

    ADP Research Institute recently conducted a global survey revealing that 64% of employees would consider finding new jobs if they were called back to the office full-time. With two-thirds of the workforce pushing back against returning to the office, firms are addressing the issue by reimagining their office designs.

    Some companies have started revamping their workspaces to make them feel less formal and sterile. In some cases, that means bringing in more comfortable furnishings and 360° HD cameras and large screens to create conference rooms more appealing. But other firms are making more significant changes, installing acoustical baffling on the ceiling to dampen sound and wood and steel overhead structures to reduce glare at their workstations.

    Another emerging trend is property owners retrofitting their offices in response to the popularity of remote and hybrid work. Bisnow reported that architects are facing an onslaught of demand as landlords want their office spaces redesigned to address the marketplace's new normal. Conference rooms are shrinking because firms utilizing hybrid and remote work models don't need large meeting spaces. And "sea of desks" layouts are out as organizations want open floor plans that enable social interactions and collaborations.

    Some businesses based in larger cities are taking more drastic action and relocating their offices to make their workers' commutes shorter and more enjoyable.

    ustwo, a digital design studio, moved from its Manhattan office to a site in Brooklyn because two-thirds of its staff lived there. And it's far from the only company to leave the borough; it has an office vacancy rate of 19%, up from 12% in the pre-pandemic era. As 78% of the 160 large employers in the area operate under hybrid work arrangements, maintaining large offices in one of the world's most expensive office real estate markets doesn't make much sense. Once again, the data indicate that large urban metros aren't ideal markets for new office building development. 

    In addition, firms should integrate growing worker interest in office building amenities into their development plans.

    Although workers are hesitant to work in densely packed big cities, they enjoy the conveniences of urban living. JLL found that Columbus-based employers got their team members back to the office with on-site perks like gyms, restaurants, and stores. It also discovered that 45% of employees want to work in a place with a dedicated relaxation area with reclining chairs and nap pods. Along similar lines, a developer in Columbus' Franklinton neighborhood increased the occupancy rate at one of their properties from 71% to 85% by installing a coffee shop and bar on the ground floor.

    Those trends indicate that in the post-COVID-19 landscape, traditional office building development strategies are no longer fit for purpose. 

    Knowledge workers that spent the last few years working from home aren't interested in long commutes or sitting in a gray cubicle all day. They want a workplace experience that makes leaving the comforts of home feel worthwhile, and employers interested in recruiting and retaining high-value talent will have to cater to those preferences. Developers can capitalize on that paradigm shift by creating modern office spaces that meet the needs of employees and employers, regardless of their home market.

    Subscribe to our Local Real Estate Development Digest to discover more insights about the commercial real estate landscape and how market trends affect your projects.

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