Office Demand Is Alive and Well in These Cities

Demand for office leasing nationally tends to slow in winter and this year is no exception, according to the latest VTS Office Demand Index (VODI).

Los Angeles and New York are recovering best, as office demand overall has reached one-third of its pandemic decline.

Nationally, the VODI remained 20.7 percent below its level a year ago, while locally, all cities tracked by the VODI declined year-over-year, with the largest declines reported in San Francisco, Seattle, and Chicago.

Boston represented the smallest decline, followed by New York City and Washington, D.C. New York City and Los Angeles’ demand for new office space are the farthest along on the road to recovery.

Nick Romito, CEO of VTS, said in prepared remarks that it’s encouraging to see some momentum in a return to on-site vs. remote work for companies across the country.

“January is generally a time for companies to reevaluate strategies before ramping up in February and March. It will be interesting to see if the momentum continues to build for more on-site work and for the leasing market.”

In some markets, though, the momentum is already clear according to an informal survey of local CRE experts.

Chicago Showing Both Hot and Cold

Damla Gerhart, principal and managing director, Avison Young, tells GlobeSt.com that even with its challenges, she’s seen significant cause for optimism in Chicago’s office market in the fourth quarter.

“While most of the market’s vacancy and availability rates saw continued increases, the flight to quality and location is apparent, with occupants seeking better spaces for their employees and boosting traffic back to the office,” Gerhart said.

Aaron Zaretsky, leasing director, Urban Innovations, tells GlobeSt.com that since mid-January, Urban Innovations has received countless inquiries about downtown Chicago for spaces ranging in size from 500 SF to nearly 30,000 SF and basically all sizes in between.

“In addition to the loft office space demand, we also continue to see inquiries for retail spaces for myriad uses in River North,” he said. “The first expected vacancy for the limited supply of retail options in UI’s portfolio will be late in the third quarter of this year right near the Merchandise Mart on the corner of Wells and Hubbard Streets.

“If the activity we are seeing early on continues through the typically busy spring and summer months, the supplemental growth in demand that we didn’t anticipate will in turn begin to move the needle of employees returning to work (at least part-time). And with the momentum shift, we should expect to see vacancies dwindle and rates steadily rise.”

Jim Adler, executive vice president, Office Services Group, for NAI Hiffman, tells GlobeSt.com that 7 million square feet of new leasing activity in the Chicago suburbs in 2022 were enough to absorb the amount of space added to the market, effectively maintaining vacancy from the beginning of the year.

“That’s a very different story from the previous six quarters of negative absorption in 2021 and 2020,” Adler said. “We view this as a very positive sign in that while we continue to see blocks of space added to the market, there was an equal amount of tenant demand to offset the negative trend. As more companies return to the office, the vacancy outlook for 2023 also remains promising.”

Thomas G. Koelzer, partner, Tenant Advisors / CORFAC International, tells GlobeSt.com that Chicago area tenants are adapting to the post-pandemic environment with many going to a hybrid work environment with flexibility between working in the office and working from home.

“We have also seen a significant increase in the number of tenants that are subleasing their Chicago office spaces,” Koelzer said. “More so in the Chicago loop, as opposed to the suburbs. Many tenants with this model are downsizing their office space.

“Some are closing their offices entirely and going to a 100% work-from-home model, although these tenants are in the minority. All of this translates into a soft Chicago area market, in favor of the tenant. Landlords are sweetening deals with increased rent abatement, higher tenant improvement allowances, and various non-financial concessions such as signage, options to terminate, expand, etc.”

Florida: What’s Available is Getting Leased

Tere Blanca, Founder, Chairman and CEO of Blanca Commercial Real Estate, tells GlobeSt.com that across South Florida, there is a tremendous return to the office, especially across the finance sector.

“In urban environments, you run into working people all the time and although not everyone has gone back to the office, it seems that three to four days a week has become prevalent in many industries,” she said.

“Overall, the impact of COVID-19 and hybrid work will take a fairly long period of time to run its course and quantify the impact on office occupancy in the US and across the world. I think we will continue to see this balance over the next two, three, four, and five years.

“Because Miami, Fort Lauderdale, and Palm Beach (South Florida in general) are experiencing such constant, amazing migration, with the demographics very strong, many companies are moving here and whatever contraction we might see is mitigated by new buildings being created.

She said there is quite a bit of new product in the pipeline to deliver over the next three to seven years; whatever is available right now is getting leased.

For example, Brickell Class A rents increased 33.7% year over year and are 56% higher than Q4 2019. “There’s an increasing asking rate gap between Brickell Class A and the rest of the market,” Blanca said. “Brickell A Premium has increased from 28% in Q4 2019 to 53%.

Leon Camarda, executive vice president at Project Management Advisors, tells GlobeSt.com that office vacancy rates are clearly low and he assumes they’re getting lower with the corporate office activity in Orlando.

“It took us three tries to get our lease advanced due to other tenants moving more quickly to tie up space,” Camarda said. “There is still evidence that Orlando office vacancy rates will continue to push down, and there is chatter in the marketplace about new office projects.”

He said there is clearly a shortage of medical office building (MOB) product in Orlando.

Bradley Colmer, CEO of Deco Capital Group, who is developing the luxury, mixed-use project Eighteen Sunset is set to deliver the first, Class A+ office space in Miami Beach this year, tells GlobeSt.com that the market has seen a significant increase in inbound investment.

“The most fundamental change to the city’s economy has been the drive to develop Class A, best-in-class office space capable of accommodating the needs of preeminent global companies,” Colmer said.

“Business decision-makers are increasingly looking to walkable lifestyle districts when it comes to locating their office space—and Eighteen Sunset is well-positioned to capture that migration.”

Texas: Austin Looks Ahead; Dallas Resilient

Nick Webster, an associate on Green Street’s research team, tells GlobeSt.com that his firm grades the Austin office market as an A+.

Green Street’s Market Grades measure 10 factors impacting long-term rent growth in 50 major U.S. metros, such as supply barriers, business friendliness, climate event risk, and more. Austin’s rapid population growth has been fueled by high business friendliness, no corporate or state income tax, and high-quality local tech talent.

“Austin’s tech ecosystem is referred to as the Silicon Hills due to the large presence of innovative tech companies,” Webster said.

Apple, Tesla, Amazon, Google, and Facebook all have a significant presence in the market and Austin also attracts large amounts of semiconductor fabrication developments which has resulted in continued labor market growth.

Samsung recently broke ground on a $17B semi-conductor manufacturing facility, which will open in Q2 2024. In addition, Samsung has proposed decades’ worth of investment in the metropolitan area that would reshape the state.

Ross Anders, vice president/general manager at Project Management Advisors, tells GlobeSt.com that the resiliency and long-term staying power of the office sector in Austin over the next decade based on what has been experienced in the past 10 years – calling it the fastest growing office market in the country, but without some near-term headwinds.

Austin’s 6.7MSF in the development pipeline is the fourth highest in the country. “But the three cities that precede it are considerably larger with a greater likelihood to absorb the surplus,” Anders said. “For example, the Dallas population is 3x the size of Austin but has a pipeline only slightly larger.”

Another factor he sees is the Austin economy is mostly driven by technology companies and we have seen those companies struggle with their return-to-office strategies.

“As a result, it is uncertain how all the existing and future office real estate will be occupied, or remain occupied, going forward.”

With the extended lifecycle of a development project in Austin and challenges with the City and its planning and utility departments, the Austin development community has become accustomed to building ahead of the market to accommodate our historically rapid office sector growth, Anders said.

“This has led to a considerable amount of development speculation, which introduces further risk into the future stability of the office sector in Austin.”

In Dallas, meanwhile, vacancy rates have been resilient, according to Commercial Edge, only increasing 40 basis points over the last year despite the many headwinds the office sector faces.

“The steadiness of the office market in Dallas has let developers remain active in the market, with 4.1 million square feet started last year and more on the way,” Commercial Edge notes.

Minneapolis Makes It ‘Fun’

Ted Campbell, director of management at Ryan Companies US, tells GlobeSt.com that historically there was what many called the amenities arms race.

“Landlords were spending millions to construct glamorous spaces for tenants to use, he said. “And currently, a lot of this space is sitting vacant. Landlords need to provide compelling and interactive experiences employees can’t get at their home offices.”

At the AT&T Tower located in downtown Minneapolis, approximately 88% of tenants are back to date (this count includes building staff).

Ryan Companies hired a tenant engagement coordinator with a background in hospitality and events during the pandemic and he has since brainstormed and executed a variety of events for the building’s tenants that have been quite successful.

The most successful event to date was a holiday party in December 2022 that had upwards of 400 people attend or more than 25% of the current occupancy. People can get free coffee and a workout at home, but not events like a hosted Oktoberfest party, beekeeping seminar or goat yoga.”

California: San Francisco Sees Record Vacancies

Not all cities, of course, are doing as well. One obvious example is San Francisco.

Kul Wadhwa, CEO and founder of BeyondView, tells GlobeSt.com that despite encouraging office market return indicators in several cities across the country, San Francisco continues to see record office vacancies.

“The return to office movement must be a joint effort as the local government takes action to make business districts appealing to prospective tenants while owners and operators demonstrate the unmet potential of their vacant spaces,” Wadhwa said.

“With these improvements, San Francisco’s office market has the capacity to attract growing technology and other businesses, if the local government makes every effort to make the city as hospitable as it once was.”

Chris Pham, JLL, senior research analyst, tells GlobeSt.com that San Francisco remains a tenant-favorable market as most major companies headquartered in the city allowed employees to work remotely for most of the pandemic.

“However, some tech companies reversed their initial work-from-home policy and are requiring employees to return to the office in a hybrid model. Train ridership into the city continues to increase into February with increased Kastle badge swipes in January. San Francisco’s mayor also announced a plan last week offering tax incentives to bring companies and employees back downtown.

“While San Francisco’s return to office remains slow, the City’s economic performance continues to outpace other US markets. San Fran continues to hold the title of the largest venture capital market in the world and is forecasted to outpace the rest of the country in GDP growth through 2030 according to Oxford Economics.”

Phil Mobley, national director of Office Analytics at CoStar Group, tells GlobeSt.com, that in general, major markets on the west coast have fared poorest.

“Negative absorption reaccelerated in San Francisco in 2022, and the market has seen tenants shed an astounding 7.5 percent of inventory since the end of 2019.

“Seattle and, yes, Los Angeles, have also seen large overall drops in occupancy that continued in 2022. On the other hand, New York was among a group of major markets including Houston, Atlanta, Dallas, and Boston, that saw positive absorption in 2022.”

San Jose has been an exception on the west coast, according to Mobley, with positive absorption in both 2021 and 2022.

“But much of this space was recently delivered for and preleased by large tech companies,” he said.

According to other indicators, San Jose’s market is not recovering. The total volume of new leases executed in 2022 in the market was 31 percent below the 2015-2019 average. Among major markets, only San Francisco and Seattle were further below pre-pandemic norms, at 47 percent and 38 percent, respectively.

The major west coast markets have also all seen increases in sublease availability that exceed the national average (which itself is over 2x).

“In general, the surge in sublease inventory is a sign of flagging demand, as tenants attempt to cut their losses on space they no longer require,” Mobley said. “This can mean offering it at discounts of 30 percent to 50 percent below direct rates, exacerbating downward pressure on market rents.”