Jacksonville Office Tenants Are Reevaluating Space Needs in 2021
The vacancy rate has climbed to 9.4% in the market and the sublease supply has increased to three or four times the pre-pandemic norm as tenants shed office space.
Jacksonville’s office tenants are re-examining their office needs in the wake of the pandemic. With the potential for permanent remote work or at least in the near-term a decreased need for office space, office leasing activity will likely continue to be a challenge for the new year, according to a new report from Colliers International.
The report says that the vacancy rate and sublease supply are the two best illustrations of the challenging office leasing market. Jacksonville vacancy has climbed 300 basis points this year to 9.4%, and the sublease supply has increased three-to-four times from pre-pandemic levels to 2.5 million square feet.
The decline in office leasing activity has destabilized rents and put downward pressure on investment activity. Currently, this has caused a wide bid-ask gap on pricing. However, deals are still getting done. In the fourth quarter, Hertz Investment Group sold the Bank of America Tower for $75.5 million or $108 per square foot to Buyer Group RMC. 6675 Corporate Center Pkwy also traded hands in the quarter for $9.4 million or $150 per square foot, and 1 News Place sold for $7.5 million or $112 per square foot.
One factor helping investment activity: new construction. Jacksonville has little new construction activity. The new construction pipeline accounts for only 1.8% of the current market supply, and most of the projects are single-tenant build to suits and medical office space, which has performed well during the pandemic. VanTrust’s Park Place at Nocatee is the only speculative multi-tenant property under construction over 100,000 square feet.
While the report notes the challenging office environment, there is some opportunity for landlords in 2021. Office owners that are able and willing to adjust to the new market dynamics could capture leasing activity from downsizing or moving tenants. Owners with capital on hand to reconfigure workspaces and floor plates are well positioned to be the winners. This could create better leasing velocity next year.
Overall, the report has a dark outlook for 2021 with fundamentals continuing to deteriorate with rising vacancy and declining rents. New construction will also continue to decline as developers try to understand the new market and wait out uncertainty.
Jacksonville isn’t alone. Several major markets are telling a similar story: rising vacancy, declining rents and increasing sublease supply. Nationally, the sublease supply is up 35%, and class-A rents are down 2.7%.