By Meghan Hall
After a slow year, construction activity is anticipated to pick up once again as a new economic cycle begins and a sense of normalcy slowly returns. In a recent report, brokerage firm CBRE evaluated the most promising markets based on a number of fundamentals. Among the most promising markets in 2021 were two familiar cities, both of which have seen a high level of recent development: San Jose and Seattle. Seattle secured the number five spot on CBRE’s overall development opportunity index, while San Jose ranked number one for office construction and 17th overall.
“Regardless of the strategies implemented, the post- COVID era will likely usher in new opportunities for the development, redevelopment and repositioning of all property types across markets,” CBRE states in its report. “The following analysis assesses current real estate supply, past performance, cost of construction and forecast performance to determine which markets and property types are best positioned for success as the next wave of real estate is introduced to U.S. markets.”
CBRE predicts that overall construction will pick up as temporary work stoppages and difficulties sourcing materials begin to fade. The vitality of markets varies widely across the United States, but each has its own strength, notes CBRE. While areas such as San Jose and Seattle can be costlier—typically noted as a major impediment to construction and development—it has not deterred new projects from entering the pipeline.
“We expect to see a significant uptick in tenant fit-out projects in 2021 as employers redesign and reconfigure spaces to accommodate new standards in health, wellness and safety,” said Jim Dobleske, CBRE global president of Project Management. “Costs, however, aren’t likely to change much; markets with high costs of land and labor won’t get much cheaper, if at all.”
Seattle’s rise to the top has been the result of some of the strongest demand across many of the main commercial real estate asset classes. The city ranks within the top ten in the nation for past-cycle rent growth and within the top five markets for its strength of supply. Pent up demand has made Seattle one of the most expensive in the nation, and even while office and retail saw a bit of a slowdown in 2020, its industrial and multifamily product remained desirable.
“Seattle’s desirable lifestyle, highly educated workforce and continued job growth, particularly in the technology, e-commerce and life sciences sectors, are driving employers to need more capacity for their product and employees,” explained John R. Miller, senior managing director for CBRE in the Pacific Northwest.“Even in the most recent downturn, developers continue to bet on these strong fundamentals and are finding above-average returns in our market as a result.”
San Jose, however, is predicted to have a rapid recovery post-recession thanks to its growing economy. Located within Silicon Valley, the increasing number of and proximity to many technology companies has bolstered the market. Strong preleasing efforts for office buildings under construction—a rate of 62 percent—provides strong fundamentals for future office development. And, prior to the recession, its rental rates grew at a quick pace. CBRE also states that San Jose’s market was largely balanced prior to the pandemic, bolstering local commercial real estate and allowing it to retain a shroud of relative stability.
“San Jose represents the urban heart of Silicon Valley. It combines one of the nation’s deepest talent pools with a spacious environment, desirable climate and a community of cultural and retail offerings,” said Mark Schmidt, a senior managing director in CBRE’s Silicon Valley office. Companies appreciate that a San Jose location is accessible to a wide swath of top-tier talent and affords room for growth.”
Looking ahead at construction and development on a broader scale, CBRE notes several emerging trends that have resulted from the current phase of economic disruption. Short-term conditions for some product types and markets will remain uncertain. Industrial and multifamily development is expected to continue to fare well, while retail, speculative office and hotel projects have stalled and may require significant commitments to bring them to market. Demand for tenant improvements and fit-outs within the office sector also generally remains low, with office tenants renewing leases as opposed to expanding to new spaces. Across all property types, building systems, new technologies, amenitization of outdoor spaces and flexible space planning will continue to be pivotal.
While today’s fundamentals can be uncertain, markets such as San Jose and Seattle continue to hold promise when compared to their national counterparts. Even though buildings will be delivered or built under the pretenses of economic uncertainty, the two markets’ fundamentals should be enough to buoy the strength of assets long-term.