Office

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The ultimate effects of the global COVID19 pandemic and local decline in the energy industry are yet to be fully known, but the initial results are obviously negative. The calendar year 2020 showed significant changes in the Oklahoma City office market, and most of those changes were negative despite some significant positive announcements. During 2020 the market experienced overall negative absorption of approximately 618,000 square feet. The total vacancy rate rose from 20.9% to 24.8%, but rental rates remained fairly flat only declining from $19.55 per SF to $19.53 per SF during the year. Local landlords continue to hold fast to existing face rates but offer lease incentives such as free rent and increased construction allowances.

Although the Central Business District experienced positive absorption of 52,000 square feet, the suburban markets had approximately 670,000 square feet of negative absorption. The North and Northwest submarkets, which are particularly heavy in energy companies, had negative absorption of 245,000 SF and 444,000 SF respectively, which begs the question of what had the largest impact on the market: the pandemic or the energy slump? The initial response would be the energy slump due to pronounced staffing reductions and a few bankruptcies, but the true impact of the pandemic likely will not be known for another year or two as most non-energy users continue to operate with a full staff even if that staff is working from home.

The Central Business District is currently 21.5% vacant compared to 21.1% vacant a year ago. Average rental rates downtown increased from $22.47 at $22.60 per square foot due to the addition of higher priced new product at 616 N. Broadway, the new headquarters for Heartland Payment Systems. Largely on the back of the purchase of the nearly one-half million square foot former Sandridge Center by the State of Oklahoma and the subsequent occupancy by various agencies, the Class A vacancy rate in the CBD fell from 21.4% to 16.3. Those gains were largely offset though by increased vacancies in Class B and C buildings.

The Northwest submarket was particularly hard hit during 2020 with vacancies increasing from 18.4% to 26.6% as all classes saw an increase in vacancy. Costco’s purchase of the 234,000 SF Hertz Administrative Center for $25.44 million kept those  numbers from being worse. Costco’s purchase will keep that space from being added to available inventory. Class A rental rates in this submarket fell from $22.39 to $21.94 per SF.

The North submarket also saw a significant increase in its vacancy as rates rose from 23.6% to 26.7% during 2020. Class A vacancy now stands at 41.7%, the highest in memory. That number could grow higher in 2021 if Chesapeake places more of its buildings on the market. Currently only one 130,000 SF is being actively marketed for lease. The entire campus comprises roughly 1.3 million square feet.

Looking forward, there is still a lot of uncertainty in the local office market. Energy commodity prices have been trending upward since their precipitous drop in April on reduced demand related to the economic effects of the corona virus. Continued increases in energy pricing would help stem the tide during the next year, but the lingering effects of COVID19 will continue to weigh over the office market as many companies have still not returned to the office. You can read a different article every day regarding the future of office space and when and if companies will fully return to their previous work environments. We witnessed significantly increased leasing activity in the fourth quarter and that is expected to continue in early 2021 as users feel more confident about the rollout of various vaccines and a return to business as usual - if there still is such a thing. Numerous surveys indicate that a good number of employees enjoy working from home, but the vast majority are eager to return to the office and most CEO’s are eager to see them back. If the vaccination programs are successful, we should have a good indication of how companies move forward with their office needs by the end of 2021. Until then, nobody really knows, but we remain bullish on recovery for the country and the local market.

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