New Office Construction Shows 6% Rise

The pace of new office construction in the United States rose 6% in August from the prior month, reigniting concern among real estate investors that development may exceed demand for new space, according to PaineWebber Inc.

New office construction starts stood at 265.2 million square feet on an annualized basis last month, PaineWebber said, citing statistics compiled by F.W. Dodge, a division of the McGraw-Hill Cos. A less-volatile three-month average of starts fell 2%. Starts are unchanged from the same month a year ago.

Starts have trended down since peaking in mid-1998 as lenders, concerned about rising supply, have required developers to put up more cash for the projects. Yet developers seem to be shrugging off higher borrowing costs. The yield on the 10-year Treasury note, the benchmark for many real estate loans, rose to 5.89% Monday from a low of 4.16% in October.

“We believe that new construction is not slowing down sufficiently to prevent prolonged pressure on [property] growth rates and vacancy rates,” PaineWebber said.

The F.W. Dodge data provides the first glimpse of commercial construction activity for the previous month. U.S. government statistics are released at the start of each month for two months earlier.

The U.S. office market is enjoying one of its healthiest periods ever. The nation’s unemployment rate is at a 29-year low as companies add workers to meet demand for goods and services. That has pushed the office vacancy rate below 10% since 1997, according to CB Richard Ellis.

The most active market for office development in August was Washington, followed by Atlanta, Dallas, Northern California and Phoenix. Washington saw 14.9 million square feet of starts, up 7% from July and 14% from a year earlier.