Salient to Investors:

Technology companies are expanding and investing in real estate, helping a nascent rebound in US office development from the lowest levels since at least 1960 as default rates on construction mortgages decline from a 2010 peak.

 Jon Southard at CBRE Econometric Advisors said there is a surprising amount of construction, given the amount of space available in the market – even the coming gradual improvement in demand will increase construction.

Robert Murray at McGraw-Hill Construction said the market is moving off the bottom in a very hesitant, gradual manner and office starts will dip this year as government stimulus programs wind down, before climbing again in 2013. US office construction starts peaked in 1985, boosted by the accelerated depreciation in 1981 tax legislation and the influx of women into the workforce during the 1970s..

Chandan Economics said construction loan default rate was 11.1 percent in Q2 2012, versus under 1 percent in 2007 and a high of 15.2 percent in Q3 2010.

During the past three years, office construction came mainly from three sources: government buildings, data centers and private projects, including corporate headquarters, said Murray of McGraw-Hill Construction.

Facebook has more than tripled its workforce since 2009 to 3,976 employees. Google has 53,546 staff versus 19,835 employees at the end of 2009.

Reis estimates the US office vacancy rate was 17.1 percent in Q3 versus 17.4 percent a year earlier and 17.2 percent in Q2, and the equivalent of only a handful of medium-size office buildings were added in Q3.

Michael Bilerman at Citigroup said Minneapolis-St. Paul leads the US for most office construction as a percentage of the existing market, followed by Houston and Boston. Seattle ranks seventh.

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