For the first time in over 10 years, a significant quantity of speculative construction is taking place in many U.S. cities. Developers have demonstrated renewed confidence in market fundamentals by starting speculative projects in the northeast cites of Boston and New York.
In downtown Boston, speculative office development was limited in the last decade. Indeed, since 2009 just three class A projects delivered into the market, with one currently underway and slated for a mid-2015 completion. In Manhattan, new construction over the last two decades were mostly build-to-suits, while developers of speculative projects waited for the commitment of an anchor tenant before proceeding.
Pre-leasing levels in speculative projects varied across Boston and New York. In Boston, pre-leasing activity ranged from 25% to 58% of total rentable square footage. Comparatively, in Manhattan, of the seven largest speculative properties delivered since 2006, overall occupancy levels ranged from nearly zero to 66% upon completion. The buildings themselves ranged in size from as large as 3.0 million square feet (msf) to as small as 296,000 sf. Surprisingly, three projects opened essentially vacant, with occupancy levels at 3.5% or lower.
Current occupier preferences for more efficient space and higher employee density (densification) are the main drivers behind the rise in the number of speculative construction starts—and the subsequent success of recent projects. It remains to be seen whether increased demand due to the ongoing trend of in-migration to CBDs and urbanization spurs additional speculative projects.