The calendar year 2019 showed minimal change in the Oklahoma City office market, but what change occurred was mostly negative. In general, the market began to give back much of the 400,000 square feet of positive absorption that occurred in 2018. Vacancies increased from 20.1% to 20.9% and absorption of space totaled a negative 68,000 square feet as more space was vacated than leased during the year. Although the Central Business District experienced positive absorption of 56,000 square feet, the suburban markets had approximately 124,000 square feet of negative absorption. Some suburban areas actually had relatively healthy absorption, but that was offset by 217,000 square feet of negative absorption in the North submarket.
The Central Business District is currently 21.1% vacant compared to 21.8% vacant a year ago. Average rental rates downtown increased from $22.23 at $22.47 per square foot due to the addition of higher priced new product at The Monarch Building. The vacancy rate in the CBD could improve slightly in the next 6 months as another mostly pre-leased building, 606 N. Broadway, is added to the rolls. 606 N. Broadway is set to become the headquarters for Heartland Payment Systems with very little space remaining to be leased to others. Another factor that could assist the CBD’s improvement is that nearly 60% of the vacant space is located in desirable Class A buildings as opposed to previous years when the bulk of the space was in less desirable Class B and C buildings.
The largest hit to vacancies occurred in the North submarket where Ackerman McQueen vacated approximately 60,000 square feet when they moved downtown and Central Park reclassified approximately 68,000 square feet of sublease space as primary vacancy. An additional 64,000 square feet of newly vacant space was added at 9400 Broadway, formerly One Benham Place. Those losses helped cause the vacancy rate in this submarket to rise steeply from 15.0% to 23.6%.
The large Northwest submarket actually had a fairly uneventful year with 29,000 square feet of negative absorption and a small increase in vacancy from 18.0% to 18.4%. However, this market will face serious challenges in 2020 as Hertz is set to vacate its 225,000 SF building in the Quail Springs area and place that space on the market in the first half of 2020. Additionally, the usually well-occupied IBC Center will soon have approximately 80,000 square feet made available by the relocations of Echo Energy and EOG Resources.
2020 will be critical year for the local office market. Despite a brief rebound from the 2014-2015 plunge in energy prices, the market has still not recovered. And, with increased investor emphasis on bottom line cash flows rather than reserves or production growth, we will likely see bankruptcies, mergers and consolidations within the industry resulting in a significant increase in vacant space. The current rig count for the state of Oklahoma currently stands at 50, compared to 141 a year ago as both investor enthusiasm and exploration in the Stack, Scoop and Merge basins of the state are in decline. Although it should be noted a significant portion of the decrease in the rig count is due to improved drilling efficiencies, but those same efficiencies result in staff reductions and office space requirements.
Make no mistake; the Oklahoma City office market is still largely dependent on the hydrocarbon industry. While no actual numbers are calculated, we estimate that the industry uses approximately 15% of the total multi-tenant space in the local office market with some pockets, particularly the North and Northwest submarkets, being as high as 30%. The CBD, which was not previously considered energy-heavy in terms of multi-tenant office buildings now is with the addition of primary vacancy or sublease space at Sandridge Tower, BOK Park Plaza and Leadership Square. A significant amount of the space occupied by local energy companies is in their corporately owned and occupied buildings and therefore not included in our report which tracks occupancy levels in multi-tenant buildings only. Unfortunately, some of those owned and occupied buildings may end up in the multi-tenant market leading to still higher vacancy rates in the coming years.