Are We Finally in a Tenant Favored Market?
Market Watch
The US office market vacancy continues to increase, now surpassing 17.1%. Locally, the Charlotte vacancy rate was 25.8% at the end of the 4th quarter. Overall absorption remained negative in 2022 both nationally and in Charlotte. This primarily resulted from the widespread adoption of hybrid and fully remote work, as companies continue to shed excess space as leases expire, and sublease space continues to flood the market.
The Charlotte vacancy rate was 22.5% at the end of the 4th quarter.
Overall absorption remained negative in 2022 both nationally and in Charlotte.
As we look ahead, both nationally and in Charlotte, the picture is becoming more clear in relation to the large gap between new, top-tier assets, and older, second-generation office buildings. Demand for new-premier buildings in the best locations is enabling developers to achieve proforma rents (and higher), along with providing a sense of recession proof security, as leasing activity remains consistent across this top-tier of office assets.
Flight to Quality
However, second-generation office buildings are and will continue to see vacancies rise as leases roll, and tenants continue their “flight to quality” in an effort to attract employees back to the office. Tenants will continue to demand more from their office buildings in the form of walkable amenities, fitness/shower/locker rooms, collaboration spaces, and conferencing. Thus, the top-tier and best located buildings will continue to see the bulk of leasing activity. As this plays out in Charlotte, save for the prime SouthEnd/Midtown office buildings which are in the highest demand, most tenants in the market will see opportunities for favorable lease terms, not seen since the Great Recession.
The dream of negotiated improvement allowances covering a tenant’s modest upfit, may once again become a reality in the not-so-distant future.
As of the date of this publications, we have yet to see landlords begin to drop their marketed rates. However, this will soon be necessary for many landlords across the market, should they hope to compete with better positioned top-tier buildings. Tenants with leases expiring between 2023 and 2025 will potentially have a great opportunity to take advantage of softening market conditions and lower construction pricing, resulting from weakening global demand. The dream of negotiated improvement allowances covering a tenant’s modest upfit, may once again become a reality in the not-so-distant future.
