2018 was a year of mixed results for the Oklahoma City office market. While vacancies increased, so did absorption of space. That is a rare occurrence, but the amount of space added outpaced the rate it could be absorbed. Although the market absorbed almost 395,000 square feet of space, over 800,000 square feet was added to the market. For now at least, the market isn’t moving forward or backward, instead it seems to be stuck in neutral. The market is actually quite active, with several large leases being signed in 2018 and several more to come in 2019. In fact, it might be more apropos to say the market is not only stuck in neutral but racing its engine. The market’s overall vacancy rate stood at 20.8% at year-end, which is up from 18.0% in the previous year
The Central Business District is currently 21.8% vacant compared to 18.1% vacant at the end of 2017. The biggest news in the CBD during the past year was the addition of the 690,000 SF BOK Park Plaza which was completed in January. The building’s first tenant was Bank of Oklahoma, who leased app. 100,000 SF and obtained naming rights. That lease was followed in mid-year by the 155,000 SF lease with Enable Midstream Services, who will move from Leadership Square this summer, creating a large vacancy in an historically popular building.
Two new buildings will be added to inventory in 2019, but they are both mostly full. The 606 N. Broadway build-to-suit project will be approximately 111,000 SF when completed, but over 90% of the building has been leased to Heartland Payment Systems and the space remaining is largely retail in nature. The other building to be added to the CBD inventory this year is The Monarch on the northern edge of the downtown submarket. The 53,000 SF building is set for a mid-year completion and is already 100% leased, with the majority to be occupied by Ackerman McQueen.
The success of those two buildings speaks volumes about the current state of the market. While there is significant vacancy creating intense competition among existing buildings, some tenants are willing to pay up for new construction with modern features, systems and amenities that can’t always be found in older buildings.
It’s worth noting that of the approximately 150 buildings we track in our report, 77% were built after 1979, but only 18% were constructed post-2000. Nearly 40% of all buildings tracked in our report were built in the boom period between 1979 and 1984. Some of those buildings have undergone substantial renovation, but the majority are showing their age, which leads to a flight to quality for those who can afford the considerably higher rents required for new construction. Landlords who own those early 1980’s buildings will be faced with significant capital expense requirements to replace aging systems or risk losing tenants to buildings that are either newly constructed or recently renovated.
The biggest hits were once again felt in the North and Northwest submarkets which have historically been popular with energy companies. Since the peak oil price in June 2014, these submarkets have experienced negative absorption of over a half million square feet, and that amount does not include sublease vacancy, which is difficult to accurately track. However, much of the sublease vacancy has or is about to burn off and we are seeing a clearer picture of where these markets stand. The North submarket experienced negative absorption of 36,000 SF and saw its vacancy rate rise from 11% to 15% during 2018, largely due to the addition of 140,000 SF of space on the Chesapeake Energy campus. If that building is successfully leased it is likely Chesapeake may open additional buildings to lease by others. The Northwest submarket had 59,000 SF of positive absorption and its vacancy rate decreased from 19.1% to 18.0%. Despite the mediocre results, these two submarkets were actually quite active with several new companies leasing space and many existing companies choosing to relocate – usually to more modern buildings within these submarkets, but also to take advantage of excellent sublease opportunities.
Although the Oklahoma economy is more diverse than ever, energy companies are still the office market’s largest user industry. With energy prices sliding back considerably in the last quarter of 2018, it could begin to weigh on the market again unless prices rebound. Should prices recover, the office market should recover as well. If not, we could experience significant downward pressure on the market in the coming year.