There has been nothing slow and graceful about the pace of the market, and it has caught many owners, lenders, developers and tenants off-guard. Due to the lack of new construction, tenants, particularly those in excess of 10,000 square feet, have but a handful of choices for existing space. Spaces that are available today are typically offered at rental rates 30 to 50 percent higher than rents the tenants are currently paying. Higher rents are driving the value of office buildings up, and are attracting investors back to them. Once again the most valuable of all commercial real estate products makes economic sense.
Investors see a substantial investment upside as leases expire and tenants renew at higher rents.
The investor has expectations of increased cash flow through the higher rents, appreciation by virtue of increased user and investor demand, and protection in value as they are making acquisitions at below replacement costs for similar new competitive product. But this time around, at least so far, there are some self-imposed industry governors on what gets built, how and why. These restrictions will restrain the naturally optimistic developers. This time around, there is a good chance new office space will be constructed only to meet real demand.