ATLANTA, GA – The rising cost of construction is resulting in higher asking rents among all property types, greater strains on custom tenant build-outs, denser office spaces and limited tenant mobility. Thus, development and leasing decisions have become more complex for owners and occupiers. The trend is expected to remain for the foreseeable future, according to CBRE’s 2019 Southeast Construction Cost Report, which includes a breakdown of the cost increases and an analysis of market impacts across 14 different cities and four sectors in the Southeast.
Several factors are contributing to the rising costs, including the cost of materials, low unemployment and therefore competitive labor costs, and government regulations at all levels.
According to the report, the National Construction Cost Index has increased more than 100 percent over the last 20 years. At this stage of the commercial real estate cycle, construction costs are rising faster than rents. To navigate this, tenants are often renewing in-place leases instead of relocating and incurring additional build-out, moving and other expenses, and are leveraging technology to enhance the workplace. Landlords are deploying capital wisely, and developers and lenders are proceeding with caution.
In the Southeast, office rents have risen by an average of more than 22 percent, with Nashville and Charlotte in the 30 percent range, over the last 5 years. Landlords must be confident that the market will support the rent increases for developers to risk new construction. New Class A office developments in the Southeast can have a rent premium of anywhere from $5 to 15 per sq. ft. triple net over existing buildings. Other than charging higher rents, there is little a developer can do to mitigate the construction costs without compromising quality.
“At no other point in America’s history have construction costs accelerated so aggressively. However, despite the historic rise in construction pricing, the Southeast’s relatively favorable cost environment, and strong growth and demand trends place it in an envious position relative to higher-cost markets,” said Dan Wagner, CBRE’s Southeast Director of Research.
Though the challenges related to rising construction costs affect the nation, the Southeast is in a better position relative to many other areas of the U.S. Large markets in the Southeast, such as Atlanta, Nashville, Charlotte and Miami, have a combined five-year average construction cost increase of 11.5 percent, notably below the national average of 13.1 percent. The lower increase sets the stage for Southeast markets to continue attracting more companies as they present cost-effective options.
To download the report, click here.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2018 revenue).