2017 proved to be another tough year for landlords in the Oklahoma City Office market. The market had negative absorption in 2017 of 166,000 square feet; coming on the heels of historically bad negative absorption of approximately 520,000 square feet in 2016. Overall, the local market’s vacancy rate increased from 15.5% to 18.0%.
The biggest hits were once again felt in the Northwest submarket which has historically been the area of choice for energy companies. Since the peak oil price in June 2014, this submarket has experienced negative absorption of 460,000 square feet. In the past three years this submarket alone contributed 62% of the market’s overall negative absorption. The vacancy rate in the Northwest rose from 17.2% to 19.1%. The good news for the Northwest submarket is that the worst seems behind it as even most sublease opportunities have been fully absorbed into primary vacancy, eliminating the shadow of an additional three to four percentage points of vacancy that was not included in our reports. This is still a very popular area of the city and leasing activity appears to be on an uptick, so this submarket should bounce back in the next couple of years.
The Central Business District’s vacancy rate rose from 13.8% to 18.1% during 2017 and that number should climb dramatically with the addition of the nearly 700,000 square foot BOK Park Plaza in 2018. That building was actually completed just after the first of 2018, but our report is a snapshot taken December 31, 2017, so that building’s full effect has not yet been felt. At least 300,000 square feet of the building is currently vacant and Bank of Oklahoma’s consolidation into approximately 100,000 square feet in that building actually results in a net loss of roughly 30,000 square feet due to the bank leaving behind 80,000 square feet in the CBD and another 50,000 square feet in the Northwest submarket. We anticipate the downtown vacancy rate could be as high as 23% by the end of 2018.
The city’s third largest submarket, North, also performed poorly with vacancies increasing from 6.9% to 11.0%. Those numbers do not include sublease space, of which approximately 180,000 square feet exists at Central Park One & Two. That additional vacancy bumps up the “real” vacancy rate in this submarket to slightly above 17%.
Although the price per barrel of oil has risen from a low of $29 in January 2016 to it’s current level in the low $60’s, we do not anticipate a significant effect on the office market as many oil companies have held onto shadow space and have also become much more efficient in their operations, requiring fewer employees than before. Although some new hires are being made, we anticipate the majority of those to be in field operations rather than in the office. And, what new white-collar positions arise will mostly settle into the shadow space companies have held onto rather than create significant increased demand for additional space.
It should be noted that the market usually favors one side or another and the tide has certainly shifted to the tenant over the landlord. Landlords have managed to avoid slashing rental rates to compete for tenants, but there has definitely been an increase in tenant-finish allowances, free rent and other concession for qualified tenants. We expect that competitive environment to continue through 2018.
Please note that due to glitches in the Oklahoma County Assessor’s office, not all building sales have been reported to allow us to provide an accurate sales report for the year. Despite that lack of complete data, 2017 was an active year with several buildings changing hands; the largest being the 1 million square foot First National Center for $23 million. The building had deteriorated due to neglect by previous owners and is now undergoing $230 million in renovations to repurpose the building as a hotel, apartments, office, retail and parking.