Office REITs in U.S. Plan the Most Construction in Decade

Office buildings in top U.S. markets are getting so expensive that landlords are choosing to build rather than buy, spurring the most development by real estate investment trusts in at least a decade.

Office REITs, led by Boston Properties Inc. (BXP), Vornado Realty Trust (VNO) and Kilroy Realty Corp. (KRC), are planning to plow almost $11 billion into new projects, triple the amount just two years ago and the most in data going back to 2004, according to research firm Green Street Advisors Inc. Much of that is focused on the coasts, including San Francisco and New York, the areas with the most demand from both tenants and investors.

Prices for office buildings in major markets have surged past peak levels, lifted in part by sovereign-wealth funds and pensions willing to accept lower yields than other investors because they are seeking safe investments. For REITs, which have to answer to shareholders seeking higher returns, building is often a better option than competing with institutional buyers.

Theyre selling assets and theyre developing, Michael Knott, a managing director at Green Street in Newport Beach, California, said in a telephone interview. Theyre going out the risk-reward spectrum by starting more developments rather than buying.

The Salesforce Tower stands in San Francisco in this artist rendering released to the media on April 10, 2014. Close

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The Salesforce Tower stands in San Francisco in this artist rendering released to the media on April 10, 2014.

Projects in the works include Boston Properties $1.13 billion tower in San Francisco that will be the headquarters of Salesforce.com Inc. and the citys tallest building. SL Green Realty Corp. (SLG) plans on constructing a 1,200-foot (366-meter) skyscraper in midtown Manhattan. Cousins Properties Inc. and Brandywine Realty Trust are developing offices in Austin, Texas.

For Boston Properties, the biggest office-focused REIT by market value, the vast majority of new investments are in development, Chief Executive Officer Owen Thomas said on an April 30 conference call with analysts. The Boston-based company has about $3.2 billion in projects, according to Green Street.

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Office REITs in U.S. Plan the Most Construction in Decade