You start off every Viking – or NFL season for that matter – with an optimistic outlook. The same goes for office. While it’s not booming like the industrial sector, there is hope for office re-entry. The FDA approved the first COVID-19 vaccine; signed lease terms are getting longer; and we’re seeing new demand in areas like the western suburbs and some mixed-use developments focused on quality and high-end amenities. On the flip side, we have rising material costs, supply chain challenges and negative absorption.
So what does this all mean? Where are we at currently with the Twin Cities office market and what’s to come? Here’s a quick Q&A with Drew Gavic, Director of Accounts in ARCO/Murray’s Minneapolis office.
What’s the good, bad and ugly as it relates to the Twin Cities office market?
The good is that everyone is busy and there is a large uptick in activity across the country. As mentioned, signed lease terms are also getting longer. The bad news is we are still seeing net negative absorption and higher sublease vacancy. The ugly, is that there’s a lot of price volatility and increases as it relates to material costs. ENR recently came out with their latest Building Cost Index. The annual inflation rate was at 14.9% in August 2021, whereas the average over the last 100+ years has hovered just over 3.4-3.6% annually. Material cost increases and supply chain shortages are real and can severely impact project schedules. This, in turn, can affect leases and the amount of TI dollars allocated towards an office buildout.
How is the construction industry responding to these rising material costs and supply chain shortages?
An office is not like a typical construction job. You want to be designed, permitted and constructed within a four-to-seven-month timeframe. Typically, the industry has defaulted to more of a linear structure where you complete a space plan, then budget and design it. When you finally get to the actual construction phase, two months have gone by and material prices throw everything off. Now, you need to value engineer the design and strategically procure materials to get back on budget. It is not a sustainable or cost-effective process.
Instead, it is important for our industry to combine design and construction teams earlier in the process. You will be able to get live feedback on the cost of finishes, and by the time design is completed, you can already have the studs, mechanical equipment, electrical service…etc. on order. This can reduce potential material delays and compress the overall design and construction process. A national procurement strategy and construction technology suite are two other ways the construction industry is responding. Luckily, as a national design-builder, ARCO is already set-up this way for faster project delivery.
How are businesses designing and building their office space post-pandemic?
Naturally, we are seeing a range when it comes to design and space planning. We have a national multisite client that previously had 25,000 SF and are downsizing to 11,000 SF. This client is fully embracing a flexible office workspace, incorporating a lot of collaborative areas for when associates are in the office.
Moving forward we will see everyone really optimize their square footage. That might mean something different for every company depending on their culture, what employees need and what is important to retain those employees. Overall though most companies are focusing on amenity spaces, outdoor areas, and collaboration rooms. There will be no wasted space within the office footprint.
How can the Twin Cities office market benefit from increased technology usage?
There is a lot of technology that can be used from a design standpoint. Revit and BIM360 are more mainstream now and used readily to coordinate everything before anyone is onsite. Construction management platforms like Procore enable design-builders like us to deliver projects faster while giving clients greater accessibility regardless of where they are working. Going back to what was said previously, if you can combine the teams earlier and deliver faster using technology, it will help offset some of the material and supply chain challenges.
*Data provided by JLL’s Second Quarter Office Market Report