Bright Days Ahead for Tenants
Market Watch
The US office market vacancy is expected to surpass previous downturn cycles in 2022, with vacancy rates predicted to top 20%. The national vacancy rate was 17.6% at the end of the 4th quarter 2021. Locally, the Charlotte vacancy rate was 19.87% at the end of the 4th quarter. And not surprising, overall absorption remained negative in 2021 both nationally and here at home in Charlotte. This is the culmination of a robust development cycle leading into the pandemic, along with the projected effects from companies rightsizing to accommodate hybrid and remote workplace strategies.
The national vacancy rate was 17.6% at the end of 4th Quarter 2021.
For reference, the national vacancy rate peaked at 16.8% in the Great Recession.
For reference, the national vacancy rate peaked at 16.8% in the Great Recession. The difference today is that office tenants have continued to perform on their lease obligations, with landlords reporting collection rates of 90% plus. Revenues and productivity have remained high, and in certain cases have even increased during the pandemic. Up until the Delta variant surfaced, Landlords were mostly optimistic for a return to office policy in Q3/Q4 of 2021. This optimism enabled Landlords to mentally hold the line on economic terms throughout the pandemic. Fast forwarding to the recent spike from the Omicron variant, corporate real estate requirements are being sidelined yet again. With the continued market uncertainty, coupled by interest rate hikes from the fed, and the highest inflation seen in forty years, we may be at the beginning of aseismic shift in Landlord confidence.
Since 2012, rents across the country have been on a steady rise, with double digit rent growth year- over- year in certain markets. Class A core assets have benefited the most with rent growth and low vacancy, primarily driven by the continued tenant flight to quality, and incessant desire by employees to have amenity rich workplaces. These core assets generally have tenant rosters that endure, whether in the boom times or in a recession. It’s the non-core assets, particularly in urban areas, that may have the toughest road ahead. Not only are some of the back office and administrative positions that have historically occupied these assets now going remote, but the front office tenants who would generally stay to take advantage of lower cost real estate , are now rightsizing and justifying higher per square foot rents to move.
Looking Forward
For tenants, it’s never been more important to create a workplace that encourages its people to return to the office. For the lower to mid-level cost Landlords, and especially those without amenities available to tenants, capital will be paramount to transform the workplace offering. For some owners, the capital required will be a dagger, which ultimately results in the asset returning to the lender, and rents falling off.
We see perhaps a tail of two worlds for office on the horizon. The haves and the have nots.
The haves will prosper as they have over the last two recessions, especially as they house the tenants who have historically been “too big to fail”. The have nots, will see darker days ahead, ultimately bringing a pendulum leverage shift back to the office Tenant. Something widely not felt since 2012 and before.
As they say, what goes up, must come down.
This is not exactly true for the haves, although the future is not crystal clear by any stretch. But for all who have ridden the tail winds of rent growth from the haves over the years, the landscape could likely be very different in the coming years.
For tenants, change creates opportunity, and bright days lie ahead. It is now time to look past the gloom of the headlines and see opportunity to create and promote company culture.
Office real estate is not dead. Rather, far from it. We are embarking on a shift from boring to exciting, which will be led by those whose visions will think beyond sending everyone home for good.
