By: Walter Bialas
As part 2 in our series, we decided to look at how the last spec office buildings performed at the end of the last cycle. This important for a couple of reasons. From the most basic financial perspective, it is critical to understand if these developments generally hit proforma and were viewed as economically “viable” – and their success (or failure) ultimately conditioned the marketplace on what may be acceptable levels of risk in this cycle.
Each of the buildings below represent larger “spec” assets that were underway as the construction cycle peaked – and were delivered into the slowdown. While we do not know how these projects were underwritten, we do have anticipated rents at the end of construction. Depending on the property, those initial rents look to have declined 3% to 5% after delivery.
In the case of 17Seventeen McKinney, asking rents in Q1 2010 were $36.65 per SF (FSG). At opening in the second quarter, rents were discounted to $35.40, or a 3.5% decline (this obviously does not include any concessions that may have been offered at the time).
What is important, though, is the ramp-up in leasing. Over 8 quarters, leasing gradually improved, with full stabilization taking place in mid-2013. While lease-up was likely slower than planned, stabilization at 95% occupancy was hit, and at an ending rental rate that was up almost $4.00 per SF over the opening discount. Given the delivery into the downturn, this should be viewed as pretty successful performance, especially since this asset has remained fully leased – albeit at the expense of older Class A properties – and continues to set the high-water mark for submarket rents.
Examples like this, however, are never quite this simple. If you recall from last week, there was very little office construction going on in Dallas. As we had noted, because of over-building in the tech bust, our office construction cycle was slow to react. Even at its peak in 2007, total construction was tame, representing only 2.7% of our inventory – and by 2009, that pipeline had dropped to a mere 1%.
So, the lesson here for these larger, last “spec” office buildings was that little brand new product existed, which kept competition pretty tight as we ran into the current expansion cycle.
Next week we will take a look at where our current office building boom may be headed.