It's A Whole New Skyline

In most markets, commercial construction is enjoying a revival

These days it seems as if the entire country is obsessed with the housing boom. But there's one area the concrete mixers have missed: office construction. Now that long-dormant sector is coming back to life. With rents creeping higher and vacancy rates slipping as businesses staff up, employers and developers are at the drawing board again. At Wells Fargo & Co.'s (WFC ) consumer-finance group in Des Moines, for instance, headcount at the subsidiary is growing by 500 to 1,000 a year. So Wells Fargo is spending $340 million to build a nine-story tower in downtown Des Moines and a four-building campus on 160 acres of former farmland on the outskirts of town.

The Wells Fargo project is a big one -- the biggest, in fact, outside New York -- with enough space for 6,000 employees. But office buildings are popping up all across the country. Starts on new offices are forecast to rise 2.5% in 2005, according to McGraw-Hill Construction (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP )). That would mark the first back-to-back annual increase since 1998. And the upturn may accelerate, with starts expected to climb 15% in 2006. "The market is edging upward hesitantly," says Robert A. Murray, McGraw-Hill Construction's vice-president for economic affairs.

That's a big shift from the beginning of the decade, when the office sector went into free fall. During the economic boom of the late 1990s, construction starts almost doubled every other year as corporations and developers scurried to make space for an influx of office workers. But many of those buildings weren't finished until the early 2000s -- just as employers began slashing payrolls. By mid-2003 vacancy rates hit 17% nationally, twice as high as they were just three years earlier, according to Torto Wheaton Research, a division of real estate firm CB Richard Ellis Group Inc. (CBG ) Starts, meanwhile, plunged by half.

Today, with demand for office space on the rise, construction cranes are dotting the skyline once more. Office employment grew at an annualized rate of 2.2% in the first quarter in the nation's top 20 metro markets, and it was up in every one for the second quarter in a row, notes Richard D. Kincaid, chief executive of Equity Office Properties Trust (EOP ), the nation's biggest owner of office space. Moreover, three of the top markets -- New York, Washington, and Orange County, Calif. -- have vacancy rates under 10%. "All the numbers are in the right direction," Kincaid says.

Well, not quite all. Some markets are still in a slump. Vacancy rates sit around 20% in Atlanta, Detroit, Pittsburgh, and Columbus, Ohio, while Dallas still tops 25%, the highest rate in the U.S. What's more, some builders have delayed work as the upsurge in prices for steel, concrete, and other building materials has thrown their budgets out of whack, says Kenneth D. Simonson, chief economist of the Associated General Contractors of America.


But elsewhere, especially in the tight top-tier markets, new foundations are being laid. Last year's unveiling of the massive Freedom Tower complex on the former World Trade Center site in New York helped lift starts by 10%. Although that project is enmeshed in political wrangling, groundwork has begun on a second giant project in Manhattan, the 1.5 million-square-foot New York Times Tower.

Building is increasing in secondary markets as well. In downtown Kansas City, Mo., H&R Block Inc. is spending about $90 million to put up a 17-story elliptical-shaped building to take the place of its current headquarters and leased space in four other buildings. Some 1,500 employees will relocate to the new headquarters when it opens late next year. The space can accommodate up to 2,100. Even in these cost-conscious times, many employers are finding they need more workers. The message to Corporate America: Build it, because they are coming.

By Michael Arndt in Chicago

Before it's here, it's on the Bloomberg Terminal.