Office

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The year began with much concern over a slowing local economy, particularly as it related to the energy industry. Then March arrived and Russia and the OPEC member countries entered into a price war that dropped the price per barrel for West Texas Intermediate crude from $60 per barrel to $13 per barrel by late April. Simultaneously, the entire planet was faced with an international pandemic that dropped the stock market by more than 30%.

During the first half of 2020 the market vacancy rate rose from 20.9% to 23.5% in the first half of 2020. The rise in vacancies has been market-wide with the Central Business District vacancy rate rising from 21.8% to 23.6% and the suburban submarkets rising from 20.8% to 23.4% vacant. Market-wide rental rates showed a slight dip from $19.53 per square foot to $19.45 per square foot. The market experienced negative absorption of nearly 536,000 square feet which was market-wide in nature rather than limited to one or two submarkets. The CBD experienced negative absorption of 146,000 SF and the suburban submarkets totaled nearly 390,000 SF of negative absorption.

The biggest story of the first half of 2020 is that the market is not nearly as damaged as it could have been. Several large deals that were completed or will be completed in the second half of the year saved the market from even higher vacancy levels. The largest of those deals was the Costco purchase of the Hertz Administrative Building in the Northwest submarket. That 234,000 SF building was being actively marketed for lease when Costco came to town in early March looking for a 120,000 SF lease space. Due to additional space requirements to allow for over 500 additional employees and the need for additional social distancing spacing, the company made the decision to purchase the building rather than lease a portion of it, closing on the $25.44 million purchase in late May and saving that 234,000 SF from hitting the market.

Other significant transactions during the first half of the year included EOG’s purchase of the former Linn Building which is next door to the building Costco purchased and Heartland’s backfilling of the Tapstone Energy space in Bricktown. EOG previously occupied approximately 55,000 SF at IBC Center, but made the move to purchase the 110,000 SF Linn Building for $21.4 million in the first quarter of the year. Roan Resources had previously occupied 90,000 SF of the Linn Building but had dramatically reduced its footprint in the past year to virtually nothing and was merged into Citizen’s Energy in Tulsa in late 2019. Heartland Payment Systems, who will occupy its new  100,000 SF building in the CBD later this year has already outgrown that building and leased an additional 40,000 SF previously occupied by Tapstone Energy in the Mideke Building. Tapstone in turn leased 25,000 SF at Leadership Square.

It appears the market will witness at least one other significant positive transaction in the second half of the year when the Commissioners of the Land Office acquire the 493,000 SF Sandridge Center and fill it with state government agencies. Sandridge is reported as having 175,000 SF vacant, but in actuality virtually the entire building was available, so not only is primary vacant space absorbed, but also the more nebulous “shadow space”.

Another company that bears watching in regard to their impact on the office market is Chesapeake Energy who filed Chapter 11 bankruptcy in late June. The company is expected to be restructured, likely with a significantly reduced office footprint. Chesapeake’s campus is comprised of approximately 1.25 million SF spread over more than 15 buildings. It is believed the company employs roughly 25% to 30% of the peak employee population when the campus was completely occupied. How Chesapeake handles the marketing of excess space  could have a dramatic impact on the market, particularly the North and Northwest submarkets. They have been trying to lease a 125,000 SF building on the campus for nearly two years with no success so far. Presumably, the company will become more aggressive in its efforts to pare its real estate holdings, but no announcements have been made in that regard. Regardless, that potential inventory of space weighs heavily on the market.

The effects of the global pandemic during the remainder of 2020 and the coming years will also be critical for the local office market. With the concept of employees working from home becoming more acceptable to numerous employers, it is hard to quantify the longterm effects on the office market locally and globally. We know it’s not positive, we just don’t know how negative it is yet. Most tenants we are working with are maintaining their current footprint for now, but many could reduce their square footage requirement as the virus persists and work environments evolve. Oklahoma City could possibly mitigate some of the damage through its position as a lower cost alternative with a high quality of life as many large corporations look to leave larger cities and dependency on public transportation.

Download the full copy of the latest market report here (email required)