There are several dynamics, on both the Supply and Demand side, which lead to over-supply of office buildings, and the initiation of development projects in already-high vacancy environments. I have found that identifying the causes is much easier than brainstorming viable solutions. This dynamic has not been as prevalent in the Boise market as it has been in some of the larger, older markets with more aged construction. However, it can be seen locally on a more isolated level.
A fundamental “flaw” (or perhaps just an inherent aspect) in the process of bringing new office space to the market, is that of time. That is, the amount of time it takes to complete a building and complete leasing after the decision to move forward has been made. This time frame can stretch from 1-5 years depending on the size and complexity of the office product. In the meantime, markets shift. Economies move up and move down. In the case of an extended build out of 3-5 years, the market environment which greets a new project, upon completion, may be very different than the market environment which existed when the planning process began. We see this commonly after the Great Recession brought on by the sub-prime mortgage collapse of 2006/2007. There were many office building developments initiated during the growth market of 2004-2006 that were completed and brought online after the demand had fallen through the floor. This would seem an oddity; watching projects being wrapped up when there was no longer any demand for them.
A second contributing factor to that of building new office space into a market with already-high vacancy is that of Functional Obsolescence. As buildings age and technology is rapidly advanced; there are many office buildings which can no longer support the demands of the modern business. These aged buildings become virtually useless as it relates to modern office space, or at the least they are devalued to the extent that they can no longer be considered “Class A” resources. As such, we often see a high overall vacancy rate but very low available supply that is of the type or quality the modern tenant requires. Developers will seek to fill this niche, regardless of the existence of high vacancy, overall.
Relating to the phenomena of Functional Obsolescence, but more centered around the demographics and needs of the modern office user, is that of an increased emphasis upon green building design, open/bright use of space, opportunities for collaboration, and amenities within walking distance. These construction and design features are increasing in demand amongst the office-space workforce; especially amongst the younger generation of Millennials. As these trends increase in volume and influence; there is an increasing demand for the specific type of office development which delivers on space demands of the present as opposed to the past user.
So, how can we combat these trends which are leading to increased vacancy rates and decreased net absorption? I feel that aggressive redevelopment and conversion strategies should be at the forefront of any solutions-oriented conversation. It is not possible to shift or alter the tidal wave of technology advances or demographic shifts in the modern office user (demand). However, it is possible to remove some of the obsolete or out dated inventory from the market and thus decrease vacancy in office space (supply). Older buildings must have a clear and expedient path to repurposing or redevelopment. We as a private investment force and we as a public policy force need to remove barriers to the repurposing of aged structures to their new “Highest and Best Use”.
NS