New construction activity in the U.S. has been on the decline, with only 50.3 million square feet (MSF) in the active pipeline as of the end of the third quarter of 2024—marking the lowest level since late 2012. During the third quarter, 7.8 MSF of new space was delivered, bringing the year-to-date total to 27.2 MSF. Notably, only 29.4% of markets tracked by Colliers saw new space added in the third quarter, and over one-third of all markets have yet to see any new construction completed in 2024.

Colliers Insight

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New construction starts over the past 18 months have been very limited across the country due to the lack of consistent demand, uncertain economic and political climates, increased construction costs, and a restrictive lending environment. However, after the Fed’s two interest-rate cuts, higher office occupancy rates in some markets, and increased leasing activity, there is strong sentiment that many U.S. markets are at or near the bottom of the cycle. A cautiously optimistic outlook for the office sector is coupled with more return-to-office mandates effective as of the first half of 2025. Colliers decided to check in with our experts to see what this might mean for potential new development in three markets: Phoenix, Las Vegas, and West Palm Beach, FL.

Overall Tenant Demand

Around the country, flight to quality persists. Tenants want a “best-in-class” environment for employees, and many companies focus on newer or “better” buildings. Phoenix has seen the demand for newer projects primarily from in-market firms. In contrast, Las Vegas and West Palm Beach have attracted demand from in- and out-of-market companies because of growth driven by the financial, sports, and professional services industries.  

The Impact of Higher Rents

Newer buildings tend to draw the highest rents in the market. While the increased occupancy costs are essential to consider, tenants are more willing to pay to improve their space because attracting and retaining the best talent remains crucial in most companies’ real estate decisions. Less space in a better-quality building allows some to upgrade without breaking the budget. Post-COVID increases in operating and construction costs for a building and space have become the norm, forcing companies to accept this new reality and evaluate their options.

How Are Space and Building Design Changing?

Post-COVID, space design is shifting, and individual offices and workstations are being balanced with more shared options for collaboration. Many companies focus on these communal spaces to attract employees to the office and promote a community culture. In Phoenix, it’s called replacing “me-space” with “we-space.”

As building design continues evolving to attract and retain tenants, it includes maximizing building amenities with gardens, balconies, activated rooftops, and touchless elevators. Floor efficiency and technology integration are top of mind for most tenants looking at new spaces. Activating space previously an afterthought — lobbies, garages, and exterior areas — is another opportunity to attract tenants.

Is New Development Imminent?

Developers in Phoenix, Las Vegas, and South Florida are in a holding pattern for new projects because of uncertainties in demand and rising costs. They require commitments for more than 50% of the space before starting a new building, but in most cases, tenants either don’t want or can’t afford to wait two years for new space.  In Phoenix, any new development is build-to-suit for corporate headquarters, not multi-tenant projects. However, many users are exploring options in existing buildings instead of new construction.

Interest in new developments is limited on a national level and varies by market. Over the past four years, tenant uncertainty about space needs coincided with the significantly increased number of options in existing buildings from subleases, new construction, and tenant contractions. The competition for better amenities in available space in high-demand locations will ultimately limit leasing choices in newer Class A buildings. However, formalizing their new workplace operation plans and space needs will eventually lead some companies to have new conversations about exploring new construction.

Data Source: Colliers Research.