Office is Overbuilding. Or Not.

Thrope says he’s less concerned about the new space leasing up, “about the new space leasing up, “because in a sense, that is supply rushing to meet demand.”

NEW YORK CITY—Over the next three years, the global economy will create 9.9 million net new office-using jobs, says Cushman & Wakefield. Office landlords will need every single one of those new positions, says a new report from the firm, “because a building boom is upon us.”

More than 700 million square feet of new office space is scheduled to deliver worldwide between now and the end of 2019. That’s the equivalent, says Cushman & Wakefield, of “five good-sized cities worth of office inventory (e.g., Washington, DC, Dallas, London, Singapore and Shanghai).”

Although demand for office space will remain robust over that same three-year period, totaling approximately 520 million square feet, “it will fall far short of supply, according to Cushman & Wakefield. “That will cause vacancy to rise in most cities around the world. From that perspective, the world is overbuilding.”

Or maybe not. Since the global economy began rebounding from the downturn, it’s been evident that occupiers have generally favored newly-built-high-quality space over older, B- and C-level product. In the US, for example, newly built space has accounted for 65% of all of the office absorption since 2012, according to the Cushman & Wakefield report.

“Developers are certainly placing some big bets on new product, but the bulk of it is concentrated in the major global cities, which is precisely where the greatest appetite is for these shiny new buildings,” says Kevin Thorpe, global chief economist with Cushman & Wakefield. “I’m less concerned about the new space leasing up, because in a sense, that is supply rushing to meet demand. It’s giving tenants exactly what they are asking for. I’m more concerned about what this wave of supply means for lower-grade product, which I suspect will have a difficult time competing.”

Leading the development boom is Asia Pacific, where nearly 60% of the new construction will be concentrated. Much of that is further concentrated in just a handful of markets: Beijing, Shenzhen, Shanghai, Manila and Bangalore, which among them account for 55% of construction taking place in the region and more than one-third of the global total.

As with the supply side, the demand side of the equation will be strongest in Asia Pacific, says Cushman & Wakefield. Beijing will have the distinction of leading the world in both supply and demand growth.

The Americas region is also in the midst of a robust construction cycle, which is set to peak this year and taper off over the subsequent two years. On the whole, the US, Canada and Latin America will all build more space than they will absorb over the next few years. “Again, it varies greatly from one city to the next, and the bulk of new space is concentrated in the largest cities, many of which arguably need it the most,” according to Cushman & Wakefield.

Development is more muted in Europe, with some cities—notably Paris, Vienna, London and Brussels—poised to reach cyclical highs in new construction over the next two years. For its part, Madrid will show steady growth amidst global deceleration of rental-rate growth.

However, Cushman & Wakefield notes that all of these markets are reporting vacancy rates that are lower than pre-recession levels. “Broadly speaking, supply and demand seem to be the most balanced in Europe relative to the other global regions,” says Thorpe.