Real News‎ > ‎2015‎ > ‎February 2015‎ > ‎

4th February 2015

Singapore Real Estate

Developers launch 'no-frills' projects

They hope more affordable prices will lead to units moving faster

Source: Straits Times / Money

DEVELOPERS are cutting back on the frills to move units in a slowing property market.

The trend is most evident at EL Development's Symphony Suites in Yishun Ave 9 and two Qingjian Realty executive condominium (EC) projects.

EL Development managing director Lim Yew Soon said the project's prices were kept affordable at $671,000 to $1.1 million as it reduced the total sellable area by not having "private enclosed spaces" such as balconies.

"Symphony Suites is designed with families and owner-occupiers in mind. Even though the floor areas seem small, the layouts have been optimised to be practical, such that the bedrooms can fit at least a queen-sized bed," said Mr Lim.

The 660-unit project, touted by industry watchers as the cheapest condominium on the market, sold 56 units at its preview over the weekend at an average price of $1,000 per sq ft (psf).

Units at the nearby Nine Residences were sold at a median price of $1,196 psf in December.

Symphony Suites, which will be officially launched this weekend, has two-bedders of 689 sq ft and 788 sq ft three-bedroom units. Three-bedders that come with a yard and utility room measure 893 sq ft while four-bedroom units are 1,023 sq ft.

Qingjian Realty is also seeing results from its move to offer bare units at two ECs.

The Chinese developer has introduced its "CoSpace flexi" units, which are essentially bare apartments without interior fittings or floor finishings. These units can be $25,000 to $45,000 cheaper.

A 1,238 sq ft unit at Bellewaters, for instance, starts at $937,000 - or $756 psf - but a "CoSpace flexi" unit would cost $736 psf. So far, five such units have been sold.

Mr Donald Ng, Qingjian's head of sales and marketing, said 195 of 651 units have been sold at Bellewaters in Sengkang at a median price of about $804 psf while Bellewoods in Woodlands has moved 93 of 561 units at $794 psf.

Separately, CapitaLand has sold 31 units at its 124-unit development Marine Blue in Marine Parade at average prices ranging from $1,800 to $2,000 psf.

The company said buyers snapped up one-bedroom units that had a study, two-bedders, as well as a penthouse during a preview that started on Jan 10.

The majority of buyers were Singaporeans, it said.

-By Cheryl Ong

URA seeks opportunities to develop underground space in Singapore

In an exclusive interview with Channel NewsAsia, URA's chief planner and deputy chief executive officer Lim Eng Hwee says that building underground is a new frontier for Singapore and presents 'almost unlimited potential'.

Source: Channel News Asia / Business

SINGAPORE: The Urban Redevelopment Authority (URA) is looking for more opportunities to develop underground space in land-scarce Singapore. In an exclusive interview with Channel NewsAsia, its chief planner and deputy chief executive officer Lim Eng Hwee said that building underground is a new frontier for Singapore and presents “almost unlimited potential”.

Some of the major underground projects that have been undertaken in Singapore include the Deep Tunnel Sewerage System, the Jurong Rock Caverns and an ammunition facility at Mandai.

Q: What are URA’s plans with regard to building underground?

A: Our approach of building a compact city is most logical in our context. We build high density, high rise especially where we are near MRT stations. It provides convenience, it makes sure our infrastructure is put to very good use, it makes a lot of financial sense, then we try to create space by reclaiming as much as we think it is necessary, but there is a limit.

So now we are starting to look at underground space. At some point when land becomes so dear, we would have no choice, which is the case of Japan, when you have no option. So underground is the default option, but as you do more of it, you find ways of managing the issues, a clever way of managing the cost and a clever way of making it a bit more optimal. The potential is huge but we have to find ways to overcome these challenges and we are trying to do it partly learning by doing.

The ammunition storage at Mandai is not just a creating a storage place and freeing up a piece of land. Storing ammunition above ground sterilises almost a huge area around the ammunition storage area. By doing that you free up a lot of land.

So going ahead, we are looking at what are the opportunities to likewise free up land and free up constraints as a result of some of these facilities above ground, by moving them underground. Take a highway for example. If you put a highway underground, straightaway, your noise problem would disappear, you don't see the traffic and your whole environment becomes better.

There are many of these opportunities. We are not the only one thinking along those lines. When we talk to our colleagues in other cities, they are also doing the same thing. Japan in particular - they are very short of land. So most of these utilitarian infrastructure, mostly are underground now. So we are also learning from them to see how we can do more of this.

Q: With limited resources in Singapore, how do you strike a balance between planning to allow for economic growth, and social and environmental considerations?

A: The approach that Singapore has taken all these years is a very pragmatic and disciplined approach, which is important. I think in most other cities, they call this a sustainable approach. In our context, it is actually out of no choice, we are just this island, so we have to make sure that whatever we do today does not compromise our potential in the future.

So we have taken the approach of thinking long-term, anticipating the needs of the future before we decide what to do now. I think that approach has served us quite well and I think going ahead, we will continue to embrace that very important principle. So to balance economic needs between growth and quality of life, these are the important considerations that are built into the long-term planning process.

We think holistically. In 50 years’ time - what do we need to continue to provide a decent housing option for our people, high density, waterfront or whatever? What is the land required to allow us to build towns in a way that will provide a good quality of living? What is the land that is needed for infrastructure supporting the community, which will change over time?

For example, we do monitor the need for land to support our education and school sites; that requirement changes over time. When you have a young and growing population, you need more schools, when you change from morning and afternoon sessions to single session, your requirement almost doubles overnight, so a lot of these policies will have land implications.

In anticipating long-term needs, we have to consider all these factors, looking at the population profile, the changing needs over time and try to anticipate what are the requirements.

Q: Singapore already offers a good quality of life to residents. Going forward, how can we continue to differentiate ourselves amid rising competition from global cities?

A: We will see Singapore becoming a little bit more urbanised, but I think some of the ingredients that we have successfully implemented over the years will remain. Even though we may be slightly more urbanised, I think we may even see more greenery in Singapore. We hope to ensure that we will have a very efficient transportation network, it's not just public transportation, roads and so on but really the whole mobility system in Singapore, we hope to bring it to the next level.

In terms of the mode of transport, the aim is to make public transport the default choice mode for most people. It would be so convenient and so comfortable that you would not think twice about using it. It becomes your default mode if you have to travel a certain distance.

So our colleagues at the Land Transport Authority are working very hard to try to double our rail network within the next 10 years or so. We are also starting to look at, on a micro, detailed level, how we can provide a more seamless connectivity for pedestrians, from a station walking to your final destination, connecting between buildings, linking where you live to your neighbourhood amenities, whether it is schools or shops or community facilities and so on.

So, essentially, you will find that in future, taking public transport and walking will be very pleasant and comfortable. We are also now trying to make cycling a possible alternative. Another very significant project is the rail corridor which is the former KTM rail line, an almost completely uninterrupted 25km stretch weaving through from the north to the heart of the city in the south.

This opens up another major opportunity for us to create something that is very significant and I personally believe most Singaporeans would be very proud of and identify with. Through projects like that, even as we continue to develop and grow, we can continue to ensure that we have a very good quality of living in terms of greenery, in terms of green coverage.

- CNA/ms

Construction sector seeks manpower policy tweaks

More effort needed to retain trained workers at company and national level

Source: Business Times / Real Estate

HARD pressed between having to cope with a limited foreign workforce and boosting productivity, the construction industry is asking the government to tweak some policies to help companies manage their manpower costs.

Top on the list is a request to allow construction firms to plough back the foreign worker levies paid to the government into full subsidies for workers' training and upgrading. Companies should also be able to use the money to reward long-service workers with gratuities, said the Singapore Contractors Association Ltd (SCAL)

Explaining the rationale, SCAL president Ho Nyok Yong said that this not only helps to raise the industry's productivity, but also encourages employers to "spare" their workers to go for training, despite the labour crunch. Even though training costs are now partially subsidised, they still add to business costs.

The gratuities will also help to retain workers at the company and national levels, he added. In fact, he is also asking the government to extend the maximum period of employment for higher skilled workers from 22 to 28 years, and that for basic skilled workers from 10 to 18 years.

"Otherwise, workers that we have trained in Singapore may leave after a few years for other countries, and the training we have invested in them goes with them," Dr Ho said.

"Retaining the experienced workers will also save us precious time having to train new workers from scratch. It also saves us the hassle of having new batches of workers acclimatise all over again to Singapore's laws, culture, weather, et cetera. You lose productivity that way," he said.

The period of employment for higher skilled work permit holders in the construction sector was already extended from 18 years to 22 years in Budget 2014.

A final round of levy hikes is due to hit employers this July. For the construction sector, while levies for skilled workers will stay put at S$300 monthly, those for unskilled workers will go up from S$550 to S$600 a month.

For those employed outside of a company's allocated man-year entitlements, levies for skilled workers will go up from S$700 to S$750, while those for unskilled workers will increase from S$950 to S$1,050 a month.

Seen in this light, it is no wonder that SCAL is also asking for safety personnel to be recognised as skilled workers - the category for which levies are unaffected.

The association is also asking the government to return any unused or balance man-year entitlements (of at least three months) to the employer, so that the company can hire a replacement worker or extend the employment of an existing worker.

One man-year is equivalent to one year of employment for a worker, but sometimes workers quit after a few months, and the company is unable to hire someone else or extend an existing employee's work permit.

Dr Ho admitted that construction firms are now "a bit more calculative" as they struggle to manage a heavier volume of projects with fewer workers.

OKH Holdings managing director Thomas Bon agreed that the proposal would help contractors if implemented. "When we have to let go of one worker, it's already a loss of productivity. With the man-year entitlements reducing, every man counts. Every one worker is very important for us," he said.

Besides this, SCAL also hopes to set up a construction hub to store precast components and heavy machinery. "There are many kinds of hubs in Singapore, but not for construction," he said.

He is hoping to work with JTC, the state industrial landlord, to provide such storage-cum-office space. This will be in line with the less labour-intensive and more productive prefabrication technology that the government is encouraging.

-By Lee Meixian

Sakae venturing into asset management

Source: Business Times / Companies & Markets

Just a month after Sakae Holdings announced it had diversified into corporate advisory services, the mainboard-listed company and owner of restaurant chain Sakae Sushi said it is now making a foray into asset management. For a start, it will set up a S$250 million fund - comprising internal and client funds - to invest in public and private opportunities that it believes have deep value due to growth prospects or market inefficiencies, Sakae founder Douglas Foo told BT.

-By Jacquelyn Cheok

Companies' Brief

Reit trading more volatile after MAS move on S$

Weaker currency is expected to lessen appeal of SGD-denominated assets: analysts

Source: Business Times / Companies & Markets

Real estate investment trusts (Reits) are getting traded with heavier volumes and more dramatic swings in prices since Singapore's central bank eased monetary policy last Wednesday. CapitaMall Trust, for instance, had gained 10 per cent from the start of 2015 to reach a one-year peak of S$2.25 on Jan 23 before losing steam. It last traded at S$2.12 on Tuesday.

-By Lee Meixian

Boost seen for S-Reits but not property developers

Reit incentives expected to be renewed but not any rollback in cooling measures

Source: Business Times / Real Estate

FOR Singapore's property sector, Budget 2015 is expected to bring mixed news. Real estate investment trusts (Reits) are more likely than property developers to see their wishlists come true.

Reits are hoping for extensions on the tax incentives they currently enjoy, but which expire on March 31, 2015. And analysts believe that some, if not all, of the expiring incentives would probably be renewed, in line with the government's moves to keep Singapore's Reit market competitive alongside regional counterparts.

Meanwhile, nothing much is expected to come out of property developers' continued faint hopes for some easing of cooling measures - simply because prices have not fallen enough, consultants say.

The Reit Association of Singapore (Reitas) has asked the finance ministry to extend the existing income tax, stamp duty and GST concessions for Singapore Reits (S-Reits) for another five to 10 years. It has also asked for the tax exemption on foreign-sourced income received from overseas properties to be extended until March 2025.

Most crucially, it is also hoping for a continuation of the reduced withholding tax (from 17 per cent to 10 per cent) for foreign institutional investors in S-Reits.

The association said that it wants to remove uncertainties in the tax regime that may hamper the long-term growth of S-Reits and derail Singapore from its goal of becoming the pre-eminent global listing hub for Reits.

Teo Wee Hwee, a tax partner at PwC, thinks that if there is one extension the government must definitely provide, it is the 10 per cent withholding tax for foreign investors, without which the Reit market would be adversely affected.

"Imagine suddenly you have to pay an additional 7 per cent tax. It will be an immediate hit. There will potentially be capital outflows. That's quite serious, since a big chunk of investors in S-Reits are foreign institutional investors."

If the tax exemption on foreign income is not renewed, it will also mar the case for Reits planning to buy overseas assets for higher yields, in a bid to diversify from falling capitalisation rates in Singapore, Mr Teo added. Having to pay taxes on acquisitions abroad could then feed into less cash for distribution to unitholders.

But market watchers believe that most of the tax incentives will likely be renewed.

Budget boost seen for Reits, but not developers

This is because it makes no sense to lessen Singapore's competitiveness especially when other Asian markets are aggressively building up their own Reit markets, DMG & Partners Research analyst Ong Kian Lin said.

"Thailand and Pakistan have just launched their inaugural Reits in the past five months. India may be coming up next. I am sure the Singapore Exchange wants to dominate the Reits space in this region," he said.

China, too, is expected to revisit its long-stalled proposal to introduce Reits in some pilot cities, possibly in the first half of this year. This is to help Chinese developers de-gear their balance sheets amid a liquidity crunch.

At the same time, within the region, Singapore's stock market is lagging behind Japan's, which is supported by a strong domestic market, and Hong Kong's, which enjoys major listings from China play.

Mr Teo said that attracting more Reit listings to Singapore would help to boost the local bourse's growth. After all, this asset class has put up huge offer sizes in recent years - the S$1.6 billion raised by Mapletree Greater China Commercial Trust in 2013, for instance.

Meanwhile, property developers are again hoping for some reprieve from policies such as the additional buyer's stamp duty and qualifying certificate rules in this year's Budget - if not a complete rollback, at the very least some tweaks.

Some are even hoping for an increase in borrowing limits under the permanent total debt servicing ratio framework.

But consultants are expecting the status quo to continue. JLL South-east Asia research head Chua Yang Liang said: "Unless developers can demonstrate that prices across the board, particularly in the mass market, have effectively softened 10-20 per cent, or counter propose with alternative measures that help increase sales activity without driving prices up, I don't think the state will respond with any affirmative action.

"They may allow some exemptions for some developers on a case-by-case basis, but not a blanket policy covering the entire market."

Lee Nai Jia, associate director of research at DTZ, added that there was still hot money sloshing around in the market despite anticipated interest rate increases. "The European Central Bank's stimulus programme, China's interest rate cuts and Japan's expansion of loans and rate cuts will add to the state's concerns that the lifting of cooling measure (will be) too early."

Still, Nomura analyst Sai Min Chow mulled the likelihood of cooling measures relaxation in the second half of this year.

He said: "We believe the government may take into consideration the rising mortgage rates (typically pegged to the spiking three-month Singapore Interbank Offered Rate, or Sibor) and deem it appropriate to unwind some of the housing policies."

-By Lee Mexian

GuocoLand raises S$170m through bond issuances

Source: Business Times / Companies & Markets

Guocoland Ltd has raised S$170 million via two bonds issuances, an announcement through its sole lead manager and bookrunner OCBC Bank showed on Tuesday. The dual-tranche offering comprised a S$120 million 2.5-year bond that paid a coupon of 3.60 per cent, and a S$50 million five-year bond that paid a coupon of 4.20 per cent.

-By Jamie Lee

Soilbuild wins S$26m HDB contract

Source: Business Times / Companies & Markets

Soilbuild Construction has been awarded a S$26 million contract by the Housing & Development Board for upgrading works at Paya Lebar Way/Aljunied Road and Tampines Street 42.              

Global Economy & Global Real Estate

StanChart (S) completes 50m yuan loan transaction linked to Tianjin Eco-City

Source: Business Times / Companies & Markets

Standard Chartered Bank on Tuesday said it has completed a transaction to provide 50 million yuan (S$10.8 million) in cross-border yuan-denominated loans from its Singapore branch to Tianjin Eco-City Keppel New Energy Development Co Ltd (TEC-Keppel) based in Tianjin, China.

-By Jamie Lee

Famed Tokyo hotel to be torn down this summer

The Okura has hosted US presidents, bureaucrats, movie stars, even James Bond; the main wing will be demolished and a US$1b, 31/2-year construction project will begin

Source: Business Times / Real Estate

Shimao reopens bond market for junk-rated companies

Source: Business Times / Real Estate

GT Land plans US$500m IPO

Source: Business Times / Real Estate

Swiss property risks still elevated amid loose central bank policy

Source: Business Times / Real Estate

NZ house price growth picks up for first time since Dec 2013

Source: Business Times / Real Estate

What caused the US housing bubble?

Source: Straits Times / Opinion

WE ARE constantly learning new stuff about the housing bubble and some of the new stuff contradicts the old. This is obviously important because the housing bubble led to the 2008-2009 financial crisis and Great Recession. What we don't understand may one day come back to bite us.

There's a standard and widely shared explanation of what caused the bubble. The villains were greed, dishonesty and (at times) criminality, the story goes. Wall Street, through a maze of mortgage brokers and securitisations, channelled too much money into home buying and building. Credit standards fell. Loan applications often overstated incomes or lacked proper documentation of creditworthiness (so-called "no doc" loans).

The poor were the main victims of this campaign. Scholars who studied the geography of mortgage lending found loans skewed towards low-income neighbourhoods. Sub-prime borrowers were plied with too much debt. All this fattened the revenues of Wall Street firms or Fannie Mae and Freddie Mac, the government-sponsored housing finance enterprises. When home prices reached unsustainable levels, the bubble did what bubbles do. It burst.

Now comes a study that rejects or qualifies much of this received wisdom. Conducted by economists Manuel Adelino of Duke University, Antoinette Schoar of the Massachusetts Institute of Technology and Felipe Severino of Dartmouth College, the study - published recently by the National Bureau of Economic Research - reached three central conclusions.

First, mortgage lending was not aimed mainly at the poor. Earlier research studied lending by zip codes and found sharp growth in poorer neighbourhoods. Borrowers were assumed to reflect the average characteristics of residents in these neighbourhoods. But the new study examined the actual borrowers and found this wasn't true. They were much richer than average residents. In 2002, home buyers in these poor neighbourhoods had average incomes of US$63,000 (S$85,200), double the neighbourhoods' average of US$31,000.

Second, borrowers were not saddled with progressively larger mortgage debt burdens. One way of measuring this is the debt-to-income ratio: Someone with a US$100,000 mortgage and US$50,000 of income has a debt-to-income ratio of 2. In 2002, the mortgage debt-to-income ratio of the poorest borrowers was 2; in 2006, it was still 2. Ratios for wealthier borrowers also remained stable during the housing boom. The essence of the boom was not that typical debt burdens shot through the roof; it was that more and more people were borrowing.

Third, the bulk of mortgage lending and losses - measured by dollar volume - occurred among middle-class and high-income borrowers. In 2006, the wealthiest 40 per cent of borrowers accounted for 55 per cent of new loans and nearly 60 per cent of delinquencies (defined as payments at least 90 days overdue) in the next three years.

If these findings hold up to scrutiny by other scholars, they alter our picture of the housing bubble. Specifically, they question the notion that the main engine of the bubble was the abusive peddling of mortgages to the uninformed poor. In 2006, the poorest 30 per cent of borrowers accounted for only 17 per cent of new mortgage debt. This seems too small to explain the financial crisis that actually happened.

It is not that shoddy, misleading and fraudulent merchandising did not occur. It did. But it wasn't confined to the poor and was caused, at least in part, by a larger delusion that was the bubble's root source.

During the housing boom, there was a widespread belief that home prices could go in only one direction: up. If this were so, the risks of borrowing and lending against housing were negligible. Home buyers could enjoy spacious new digs as their wealth grew. Lenders were protected. The collateral would always be worth more tomorrow than today. Borrowers who couldn't make their payments could refinance on better terms or sell.

This mindset fanned the demand for ever-bigger homes, creating a permissive mortgage market that - for some - crossed the line into unethical or illegal behaviour. Countless mistakes followed. One example: The Washington Post recently reported that in the early 2000s, many middle-class black families took out huge mortgages, sometimes US$1 million, to buy homes now worth much less. These are upper-middle-class households, not the poor.

It is tempting to blame misfortune on someone else's greed or dishonesty. If Wall Street's bad behaviour was the only problem, the cure would be stricter regulatory policing that would catch dangerous characters and practices before they do too much damage. This seems to be the view of the public and many "experts".

But the matter is harder if the deeper cause was bubble psychology. It arose from years of economic expansion, beginning in the 1980s, that lulled people into faith in a placid future. They imagined what they wanted: perpetual prosperity. After the brutal Great Recession, this won't soon repeat itself. But are we forever insulated from bubble psychology? Doubtful.

-By Robert J. Samuelson

N.J. Property Taxes Rise to Record $8,161 Annually on Average

Source: Bloomberg

(Bloomberg) -- New Jersey’s average residential property-tax bill rose 2.2 percent last year to an all-time high of $8,161, slightly exceeding governor Chris Christie’s 2 percent cap on growth in the levies, according to state data.

The average homeowner paid $173 more than in 2013. The state’s real-estate taxes are the nation’s highest, and their unpopularity helped Christie oust Democrat Jon Corzine in 2009.

Kevin Roberts, a spokesman for Christie, didn’t return a phone call or e-mail seeking comment.

Christie, 52, a second-term Republican, instituted the cap in 2010. Local real estate levies are the prime funding source for towns and schools in New Jersey.

Property taxes have increased 75 percent since 2001, when the bills averaged $4,661, according to data from the New Jersey Department of Community Affairs.

-By Terrence Dopp

Abu Dhabi’s Surging Home Rents to Grow at ‘Slower Pace’ in 2015

Source: Bloomberg

(Bloomberg) -- Abu Dhabi residential rents, which surged after the government removed a cap on rate increases in 2013, will climb at a “slower pace” this year, global commercial real estate firm CBRE Group Inc. said.

Home rents in the United Arab Emirates’ capital rose 3 percent in the fourth quarter compared to the previous three months, and were 17 percent higher than the same period in 2013, CBRE said in an e-mailed report on Tuesday.

The U.A.E., holder of about 6 percent of the world’s oil supply, built thousands of homes, offices and hotels as it aimed to transform itself into a tourist destination. In November 2013, the sheikdom removed a cap that barred landlords from increasing rents by more than 5 percent. A surge in rents followed as landlords raised prices and tenants were forced to move.

“Despite rising housing stock, the Abu Dhabi residential market continues to outperform most other property assets,” said Matthew Green, head of U.A.E. research and consultancy at CBRE. “We expect the recovery in residential rental rates to continue, albeit at a slower pace than during the first half of 2014.”

Construction of about 35,000 homes is expected to be completed in the next three years. Most of the new supply will be in new developments, which will attract residents looking to move away from “inferior properties,” Green said.

Limited Supply

Abu Dhabi is expected to reinstate a ceiling on rents this year and is looking to introduce a rental index, Craig Plumb, head of Middle East research for Jones Lang LaSalle Inc., said Jan. 27 in Dubai.

Commercial rents remained steady during the fourth quarter amid flat supply, Green wrote. In 2015, prime rents probably won’t change substantially, “with limited new supply and a slow period for new demand,” Green said.

Prime office rents in Abu Dhabi are about 1,850 dirhams ($504) per square meter a year and average office prices are 1,150 dirhams, CBRE said.

“Public expenditure remains the key driver for Abu Dhabi’s office demand,” so an increase in the 2015 budget may boost demand for offices in the short term, said Green. “However, amidst the current slump in oil prices, another major occupier group, the oil and gas sector, could be set for a period of decline.”

Many companies looking for space may cancel or halt such plans while others may downsize should low oil prices persist, he said.

-By Zainab Fattah

Offices Minus Tenants Rise Beyond Manhattan: Real Estate

Source: Bloomberg

(Bloomberg) -- Portman Holdings LLC, which has built high-profile properties such as San Francisco’s One Embarcadero Center, plans to break ground in June on its first U.S. office development without tenant commitments in more than 25 years.

Portman’s project is in Charlotte, North Carolina, while builders such as Houston-based Hines and San Antonio, Texas-based USAA Real Estate Co. are also looking beyond the biggest U.S. cities and starting projects in smaller markets, even without tenants lined up. Such speculative ventures were shunned by developers after the 2008 property crash.

“Everything in major markets like San Francisco, New York and D.C. is fully priced with low returns, high land costs and peak sales prices,” said John Portman IV, chief operating officer at the Atlanta-based firm. “It’s almost too late for any investors and developers to participate.”

The dearth of development in secondary markets, coupled with employers seeking to cut costs and young workers searching for affordable living, is buoying demand for office buildings.

In Charlotte, Portman’s 370,000-square-foot (34,400-square-meter) building is one of two spec projects planned for the area, the city’s first such developments in five years, according to the company.

The cost of doing business in Charlotte is 86 percent of the national average, while the city’s millennial population -- those between the ages of 20 and 35 -- grew 23 percent in the past five years, the most of 75 U.S. markets in a 2015 study by PricewaterhouseCoopers LLP and the Urban Land Institute. That increase was more than double the U.S. average.

Faster Growth

“More jobs are being created in lower-cost markets,” said Mitch Roschelle, a partner at the U.S. real estate advisory practice of PricewaterhouseCoopers. “These markets are going to be hot in terms of investments and new developments, markets where urban population growth is considerably higher than the national average -- Houston, Austin, Atlanta, Phoenix.”

In Atlanta, Hines has three office developments planned or under way, the first such projects in the area for the company in eight years, according to John Heagy, senior managing director at the Atlanta office of Hines. At least one of the developments is speculative, he said. The company also has a spec office project in the works in Denver’s Union Station neighborhood and plans to break ground in three months on another one five blocks away.

‘Front Lines’

“Denver is one of those areas that are on the front lines of office spec development,” said Jay Despard, managing director for Colorado of Hines. “In places like Denver, as opposed to San Francisco or New York, employers can maintain an employee base at a lower cost. And, alternatively, when younger individuals are coming out of graduate or undergraduate programs, they move somewhere with a lower cost of living.”

Spec office development in second-tier markets fell out of favor after the crash because bigger cities tend to fare better during downturns, with their larger, more diverse pools of employers, Roschelle said. Atlanta’s office space was almost 18 percent vacant in November 2011, a record high for the city, according to CoStar Group Inc. At the end of last year, the rate fell to 14.3 percent, still the eighth-worst among the 54 largest U.S. markets tracked by the real estate research firm.

“In most markets, there is still less need for new space,” said William Glazer, president and chief executive officer of Keystone Property Group, a Conshohocken, Pennsylvania-based commercial developer. “Look at law firms. All the law libraries are now online. The space requirement per lawyer can be dramatically reduced, the support staff has been dramatically reduced.”

Gaining Confidence

Still, office developers are gaining confidence as demand for space has risen across the U.S. Last year, total occupancy gains in central business districts reached 23.2 million square feet, the highest level in 15 years, according to a January report by brokerage Cushman & Wakefield Inc. Atlanta had the fourth-biggest gain, after Manhattan, Chicago and San Francisco.

Southern California’s Inland Empire, New Haven, Connecticut, and Portland, Oregon had the biggest declines in office vacancies last year from 2013, Cushman said. Across the U.S., rising demand is driving office construction, which is likely to jump to 36 million square feet this year, up 65 percent from 2014, with the majority of projects planned for suburban markets, said Maria Sicola, head of research for the Americas at Cushman.

‘Priced Out’

“Companies are being priced out of the big markets and are moving all or portions out,” she said. “Markets that are developing their own urban centers and are becoming their own brands are especially attractive.”

Technology-related jobs were the key driver of office demand last year, according to Cushman. Smaller, lower-cost markets may benefit from the emergence of new companies in that space, according to Roschelle of PricewaterhouseCoopers.

“More and more investors in startups don’t want them to be in Silicon Valley, where everything is super-expensive,” he said. “They want them in places like Cleveland, where operational costs are very low, and that means more demand for office space in those places.”

Such prospects are luring even foreign investors to smaller markets as they search for better returns, according to Will McIntosh, USAA’s head of research. Overseas investors historically have preferred large, gateway cities.

“Asian institutional investors are finding it more difficult to get reasonable returns in major U.S. markets,” Kye Joon Lee, who oversees institutional investments from Asia into the Americas for New York-based Clarion Partners LLC, said this month at an Information Management Network real estate conference in Laguna Beach, California. “They are more willing to go to non-major markets.”

Without Tenants

USAA raised a $700 million fund to invest in office developments, including those without committed tenants, in growth markets, according to McIntosh. More than 70 percent of the USAA fund is cash from a mixture of foreign and domestic investors. The fund plans to deploy all the money within three years, according to McIntosh.

“We’ve had Korean investors that have come to the U.S. over the past year looking to invest,” he said. “We do take them to see assets in cities they know, but also take them to secondary markets to help them understand.”

Even with rising demand for newly built offices, getting financing for speculative projects remains challenging. That issue, combined with a glut of old buildings and increasing construction costs, are leading some companies to redevelop existing structures, Roschelle said.

‘Repositioning’ Buildings

“Even though there may be cranes, a lot of construction is often for a specific user,” he said. “Otherwise, many developers are still more focused on repositioning existing assets, which is less costly for the landlord and often more viable for the tenant due to lower rent -- or a combination of the two.”

To keep luring tenants and developers from major urban markets, secondary cities have been investing in public projects, such as the Atlanta Streetcar transit system and similar initiatives in Seattle and Cincinnati. Denver raised taxes and issued bonds to help convert the old rail land around the city’s Union Station.

As the job market continues to improve -- 2014 was the best year for the U.S. labor market since 1999 -- smaller markets are likely to continue to lure more developers who have focused on top-tier cities, John Portman said.

Portman’s Charlotte development will have an elevated green plaza, two-story corner balconies, floor-to-ceiling windows, a fitness center and a conference facility.

“There should be a volatility decline in these markets as they get larger and attract more capital,” he said. “They will become safer and safer down the line.”

-By Nadja Brandt

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