The bespoke office: Why new construction in major U.S. business districts has become its own market

Rising development costs and a shrinking speculative pipeline have transformed newly built office properties from a competitive product into an asset class with its own economic dynamics.

For most of U.S. commercial real estate’s modern history, office rents were discovered through competition. Developers built, tenants chose among options, and the market cleared at a price set by the balance between them. That process was imperfect, cyclical, and occasionally irrational. It was nonetheless a genuine market.

But that process no longer applies to new office construction. In its place is something closer to cost arithmetic: a negotiation not between landlord and tenant, but between a developer’s pro forma and a tenant’s willingness to make it work. Understanding why this happened, and what it means for how these assets should be valued, is the more important question facing office investors today.

Construction costs have outrun rents — and that changes everything

The starting point is a structural reality that has received less attention than it deserves: the cost of building new office space has risen dramatically over the past several years, and it has done so faster than rents in most markets have followed.

Hard construction costs, driven by materials inflation, labor shortages, and supply chain disruption, increased substantially through the post-pandemic period. Soft costs and financing costs compounded the pressure; developers executing on new projects in 2023 and 2024 were borrowing at rates that bore little resemblance to the environment in which those projects were originally conceived. Land values in core urban markets have remained stubbornly elevated even as transaction volumes fell.

The result is that the economics of new office development require rents that, by historical standards, look aggressive. They are not aggressive. They are the mathematical output of what it costs to build, financed at current rates, underwritten to a return that justifies the risk. Yield on cost — stabilized income divided by total project cost — is the developer’s fundamental metric. In the current environment, hitting a defensible yield means asking rents that the broader office market, with its elevated vacancy and subdued absorption, would never support on its own.

Construction costs have moved to a level where the rent required to justify new development has structurally exceeded what a competitive, commodity office market would produce. Something had to give. What gave was the nature of the tenant.

When the pro forma replaces the market

In a normal development cycle, speculative construction creates a supply of new space that tenants absorb at market-clearing rents. Those rents reflect genuine price discovery: what the marginal tenant will pay given the available alternatives.

Since 2021, that cycle has effectively ceased to function for office. Speculative development requires a lender willing to fund it and an equity partner willing to underwrite lease-up risk. In an environment of elevated costs, dislocated capital markets, and deep uncertainty about long-term office demand, neither has been forthcoming. Across major U.S. markets, new starts have collapsed from their post-pandemic peaks. The speculative pipeline, for practical purposes, does not exist.

Construction starts collapse: Peak year vs. 2023–2025 average

What replaced it is a fundamentally different transaction. Nearly every meaningful office development in recent years has required a pre-committed anchor tenant — one who agreed, before construction began, to occupy enough of the building at sufficient rent to make the math work.

A handful of projects currently under construction were originally conceived as speculative, and select markets such as Boston and the Bay Area retain some pipeline with dual office-lab optionality, complicating a clean read. But for new commitments, the developer is not building on the bet that the market will appear. Instead, the tenant is effectively commissioning a building and agreeing to cover the cost of making it happen.

This dynamic may prove temporary — as capital markets stabilize and confidence in office demand strengthens, speculative development is likely to return in certain markets. For now, however, that inflection point remains out of reach for most U.S. business districts.

This reframes what “asking rent” means in the new-construction context. The rent is not what the landlord hopes to achieve in competition with other landlords. It's the output of a pro forma: construction cost plus required spread over the risk-free rate, divided into leasable area. The tenant is not negotiating against comparable buildings. In most cases today, there are no comparable buildings because nothing is being built speculatively to establish a comp set. The developer’s underwriting has become, by default, the market’s price discovery mechanism.

Public REIT developers make this unusually transparent. Subject to capital markets scrutiny and obligated to underwrite to returns their equity holders can evaluate, they disclose yield-on-cost targets on their development pipelines. When a public REIT proceeds to construction, it certifies that the signed lease clears that hurdle. These are not aspirational rents negotiated down at the finish line. They are the rents tenants agreed to because agreement was the condition of the building getting built.

Washington, D.C. starts, deliveries, and rent index

Who can afford to be that tenant

The logical consequence of cost-driven rents is a significant narrowing of who can anchor new development. The rent required to justify construction today is not accessible to the broad office market. It requires a tenant of sufficient scale to absorb meaningful pre-leased square footage with sufficient credit to satisfy construction lenders.

In markets like Washington, D.C., where the gap between new construction rents and existing alternatives is pronounced, the anchor tenant is also accepting a significant premium relative to the cost of renewing or relocating within existing stock. In other markets, that gap is less clear cut. In some cases, new construction rents are competitive with — or even below — the upper end of a submarket’s existing trophy range, making the decision less about price tolerance and more about product availability and long-term operational fit.

What is consistent across markets is the non-discretionary nature of the requirement — these are tenants for whom the right combination of floor plates, systems, sustainability credentials, and address isn't available in the existing inventory at any price.

That tenant profile is narrow by definition. Large law firms consolidating into purpose-built space. Financial institutions making long-dated workplace commitments in support of return-to-office mandates. Corporate headquarters where the building itself is part of the brand and talent proposition. These are not tenants shopping on price. They are tenants solving for a specific product that the existing stock cannot provide, and for whom the cost of not getting that product — in retention, culture, and operational capability — exceeds the incremental rent.

The scarcity of new construction starts is not primarily a story about weak demand. It is a story about a very small pool of tenants capable of clearing the bar that current development economics have set.

The starts that do appear represent that pool expressing itself. The silence in between represents everything else.

The exit pricing implication

If rents in new construction are a byproduct of development costs rather than competitive market dynamics, the implications for exit pricing are more durable than the broader office narrative would suggest.

The conventional concern about elevated office rents is rollover risk: that rents achieved at the top of a cycle will prove unsustainable at lease expiration. That concern is legitimate where rents were bid up by cyclical demand. It applies differently when rents are set by the arithmetic of what it cost to build. Construction economics in 10 or 15 years are unlikely to be materially more forgiving than they are today. The rent required to induce the next development will not be lower. The floor moves up, not down.

The tenant profile compounds this. An anchor who pre-committed to a long-dated lease in order to get a building constructed has made a deliberate, capital-intensive decision. The switching costs at lease expiration are high, from the physical relocation and operational disruption to the reputational commitment of a specific address. And the replacement tenant at that point will face the same development economics, the same thin pipeline, and a building that has only grown more differentiated from an aging broader stock.

U.S. new construction rent composite index

For institutional capital underwriting exit cap rates on these assets, the argument for durability is structural rather than cyclical. The income is well covered. The tenant is creditworthy by construction, given that uncreditworthy tenants cannot anchor development in the first place. And the supply conditions that produced the original rent are unlikely to reverse. Costs have not come down, financing has not become easier, and the entitlement environment in most major markets has not become more accommodating.

The pipeline delivering over the next several years reflects decisions made when conditions were already difficult. What follows it is thinner still. Assets being stabilized today are entering a hold period in which their scarcity value is likely to grow, not diminish.

Conclusion

The office market remains deeply bifurcated, and this analysis is not a rehabilitation of the asset class as a whole. The commodity market — older product, undifferentiated space, and tenants with genuine alternatives — still faces structural headwinds that are well understood.

What is less understood is that a separate market has formed alongside it, operating under different rules entirely. In this market, rents are not discovered through competition. They are calculated from cost. Tenants are not choosing among options. They are commissioning solutions. And the assets that result are not conventional office investments subject to the traditional cycle of oversupply and correction. They are long-dated, creditworthy income streams in a supply environment that has no near-term path to relief.

Investors who evaluate these assets through the lens of the broader office market are applying the wrong framework.

“The question is not whether 'office,' as a monolithic construct, is recovering. The question is whether the asset in question belongs to the market that is — or the one that isn’t.”

Marion Jones

Principal, Executive Managing Director of U.S. Capital Markets

New York City, New York

Reach out to one of our experts for more information.

Marion Jones

Principal, Executive Managing Director of U.S. Capital Markets
Alex Ern

Senior Manager - U.S. Capital Markets, Market Intelligence
Tucker White

U.S. Office and Life Sciences Lead, Market Intelligence

The bespoke office: Why new construction in major U.S. business districts has become its own market Rising development costs and a shrinking speculative pipeline have transformed newly built office properties from a competitive product into an asset class with its own economic dynamics.